The year 2024 will be marked by a surprising dynamic on the stock market: the euro, after having suffered a difficult first half of the year, has recovered against the US dollar. This turnaround surprised many analysts who, a few months ago, saw the euro sinking further.
An unexpected rise in the euro
The start of 2024 has not been kind to the euro. Against a dollar strengthened by the Fed's restrictive monetary policy, the European currency lost up to 3% of its value in the first six months of the year.
This situation was largely explained by the economic slowdown within the eurozone and the decision of the European Central Bank (ECB) to lower its key rates from June, in an attempt to support the economy.
In theory, lower rates reduce the attractiveness of a currency because they encourage investors to seek returns elsewhere.
However, the situation began to change as early as July. While the euro was trading below $1.07 on the stock exchange at the end of June, it quickly recovered to reach $1.11 within a few weeks.
This rise is mainly explained by a bout of weakness in the dollar, itself caused by disappointing American economic statistics.
Among them, the July jobs report was particularly poorly received, causing panic in the markets and reinforcing expectations of rate cuts by the Fed.
Rate cut expectations: A driving force for the euro
The euro's rebound against the dollar is rooted in expectations of rate cuts in the United States.
Since the beginning of August, investors have been anticipating sharper-than-expected reductions in US key rates, which is weighing on the dollar.
According to the tool CME Group Fedwatchthe market now expects a 100 basis point cut by the end of the year, while in July expectations were for only 50 basis points.
This prospect has strengthened the euro, as a cut in US interest rates reduces the yield gap between the dollar and the euro, making the latter more attractive.
Moreover, the Bank of Japan's rate hike in late July triggered a massive unwinding of carry trade positions, where investors sold dollars to buy more profitable currencies. This phenomenon contributed to the dollar's decline and, by extension, the euro's rise.
However, some analysts, such as those at UBS, remain cautious. They believe that the “fair value” of the eurodollar is around 1.095, suggesting that the euro could be overvalued in the short term.
Fed Chairman Jerome Powell's upcoming speech could also influence the market outlook depending on its tone, which could be less dovish than expected.
What are the prospects for the future?
The question now is whether the euro can continue its rise against the dollar.
According to Bank of Americathe euro could reach $1.12 on the stock exchange by the end of the year, a slight increase from its current level.
However, UBS warns that the euro may have overshot its economic fundamentals, suggesting that the European currency could decline if the US economy shows stronger-than-expected signs of recovery.
Beyond monetary aspects, other factors could also influence the Eurodollar pair. The carry trade could continue to play an important role, depending on central bank decisions and movements in emerging markets. Furthermore, geopolitical and economic developments, both in Europe and the United States, will remain key variables to watch.
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