Credit Agricole recommends selling EUR/USD rallies above 1.10, anticipating a decline towards 1.05 in the coming months. This recommendation is based on a mix of currency drivers, including central bank policies and macroeconomic risks, that are expected to negatively impact the EUR/USD pair in 2024.
- Premature EUR/USD Recovery: Credit Agricole views the recent EUR/USD recovery as premature, likely leading to a phase of underperformance in the coming months, pushing the pair back towards 1.05 within a year.
- ECB and Fed Policy Outlook:
- EUR/USD is expected to be influenced by the relative policy outlook of the European Central Bank (ECB) and the Federal Reserve (Fed).
- Both central banks are expected to start rate cuts in Q3 2024, but the ECB is predicted to ease more aggressively than the Fed, potentially by 75 basis points compared to the Fed’s expected 50 basis points.
- This tightening of the ECB-Fed policy rate spread is likely to drive EUR/USD towards 1.05 by Q4 2024.
- US Recession and Election Risks:
- Historical patterns suggest that growing risk aversion at the onset of US recessions tends to negatively impact EUR/USD.
- The potential risk of a Trump presidency and the associated fears of a renewed escalation in global trade wars could further weigh on the EUR.
- These factors could push EUR/USD back towards 1.05 towards the end of 2024.
Credit Agricole's analysis leads to a recommendation to sell EUR/USD rallies above 1.10, targeting a move back towards 1.05. The bank's outlook is shaped by the anticipated policy actions of the ECB and Fed, as well as macroeconomic and political risks in the US. These factors collectively suggest a challenging environment for the EUR against the USD in 2024, justifying a bearish stance on the currency pair.