EUR/USD outlook for 2024 as per UBS

EUR/USD is nearly flat over the past three months after the most recent aggressive selling of the greenback. Since the start of the year, the pair is up 1.6%.

The decline in October's inflation figures triggered the most significant sell-off of the year for the greenback. The U.S. Dollar Index, gauging the greenback against a basket of foreign currencies, has experienced continued weakness in recent days.

This downturn can be largely attributed to the cooler-than-anticipated inflation report for October, revealing a modest 3.2% year-over-year increase in prices. In response, investor expectations have heightened regarding a potential mid-2024 interest rate cut by the Federal Reserve.

The anticipation of lower rates typically exerts downward pressure on the dollar, prompting investors to shift away from investments like Treasurys in pursuit of more favorable returns elsewhere in the market, like stocks.

So, what is the outlook for the dollar and for EUR/USD, specifically, as 2023 draws to a close? According to Swiss banking titan UBS, the euro is likely to continue strengthening against the dollar in 2024.

“We expect EURUSD to drift higher at a modest pace over the next 12 months. The US hiking cycle is very likely to give way to rate cuts in 2024. The soft October CPI print reinforced this view,” UBS currency strategists including Thomas Flury said in a client note.

However, there’s a catch. While UBS sees the dollar further weakening, it doesn’t expect the drop to happen suddenly.

“Looking across the pond to the Eurozone, we find little that could inspire a strong euro rally. Growth is likely to be lackluster next year with little hope for surprises to the upside.”

Accordingly, the primary hurdle for the euro rally lies in the absence of global growth. A robust demand resurgence for European exports in emerging markets has the potential to instigate a rebound in EUR/USD, reaching 1.20 or beyond.

However, a substantial impediment to a sustained euro rally remains the persisting geopolitical tensions in the Middle East and Ukraine. These uncertainties are anticipated to endure, adding complexity to the trajectory of the single zone currency.

“Any potential for the USD to surge is likely to be limited by politics. Uncertainty leading up to US presidential elections in late 2024 should weigh on the dollar,” Flury added.

All-in-all, UBS expects to see EUR/USD range-bound in the zone between 1.05 and 1.10 in the
first months of the new year. However, the bank also expects to see the euro break the 1.10 barrier against the dollar and heads towards the 1.15 mark.

By Senad Karaahmetovic

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