EURO

FORECAST:
Q2, 2024
NICK CAWLEY, SENIOR STRATEGIST
EURO FORECAST: Q2, 2024

DailyFX Research Team

Table of Contents
Euro Fundamental Forecast: ECB Will Start Cutting Interest Rates in Q2 .........................................3

Euro Poised for a Fundamental Change ................................................................................................ 3

Euro Area Inflation is Seen Falling Further ............................................................................................ 3

Euro Area Growth to Remain Tepid this Year ........................................................................................ 4

Will the ECB Start Cutting Rates in June? ............................................................................................. 4

Euro Q2 Technical Forecasts: EUR/USD, EUR/GBP, and EUR/JPY ...................................................6

EUR/USD .................................................................................................................................................. 6

EUR/GBP .................................................................................................................................................. 7

EUR/JPY................................................................................................................................................... 7

Disclaimer ......................................................................................................................................9

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Euro Fundamental Forecast: ECB Will Start Cutting

Interest Rates in Q2

Euro Poised for a Fundamental Change

The European Central Bank will cut rates in the second quarter of the year and will continue to cut
borrowing costs during the second half of the year if recent central bank rhetoric is to be believed.
The financial markets certainly think that this is the most likely scenario and that is going to weigh on
the euro in the weeks and months ahead.

Euro Area Inflation is Seen Falling Further

The latest ECB Staff Projections suggest the inflation will continue to fall further over the coming
months and quarters with energy inflation ‘projected to remain in negative territory for most of 2024’,
while food inflation is expected to ‘decline strongly from 10.9% in 2023 to an average of 3.2% in 2024’.
With price pressures receding quickly, the European Central Bank now has added confidence, and
flexibility, on the timing of their first interest rate cut.

Euro area HICP inflation

Source: European Central Bank

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Euro Area Growth to Remain Tepid this Year

Euro Area growth is set to remain weak this year, according to a range of official forecasters, with the
latest ECB projections suggesting a tepid 0.6% recovery for 2024. Recent data showed that the Euro
Area economy expanded by a downwardly revised 0.4% in 2023, hampered by weak demand and
elevated borrowing costs. The Euro Area’s largest member state, and the prior growth engine of the
19-member block, Germany, has been unable to boost economic activity to anything like its previous
levels and is seen growing by just 0.2% in 2024. Recent comments from German Economic Minister
Robert Habeck suggest that the economy is ‘in tricky waters and that Germany is coming out of the
crisis ‘more slowly than we had hoped’, adding to fears that the German economy is flatlining. The
German government originally forecast GDP growth of 1.3% in 2024. The German economy has been
hit hard by weak export growth due to lower global demand and its prior dependence on Russian oil
and gas. Germany ceased importing Russian oil and gas in late 2022 after Russia invaded Ukraine.

Will the ECB Start Cutting Rates in June?

At the last ECB Monetary Policy meeting in March, President Christine Lagarde admitted that while
the Governing Council have not discussed rate cuts, they have begun ‘discussing the dialling back of
our restrictive policy’. Ms. Lagarde also added that the central bank is making progress on pushing
inflation towards target. ‘And we are more confident as a result. But we are not sufficiently confident,
and we clearly need more evidence, more data…We will know a little more in April, but we will know a
lot more in June’. This referencing of the June meeting saw market expectations of a rate cut at the
end of H1 jump. Financial markets are currently showing a 64% chance of a 25-basis point move at
the June 6th meeting, while the market is currently undecided if the ECB will cut three or four times
this year.

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ECB – Probability Distribution

Source: Refinitiv, Prepared by Nick Cawley

With inflation moving further lower, and with growth weak at best, the ECB will start the process of
unwinding its restrictive monetary policy at the June meeting, with a very real possibility of an
additional cut at the July meeting before the August holiday season kicks in. The ECB will not be the
only major central bank to start lowering borrowing costs this year, but it is very likely that they will be
the first and this will leave the Euro vulnerable to additional bouts of weakness in the months ahead.

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Euro Q2 Technical Forecasts: EUR/USD, EUR/GBP, and

EUR/JPY

EUR/USD
EUR/USD has had a bumpy ride so far this year with the most actively traded fx-pair starting the year
just off a six-month high before sliding to a multi-week low in mid-February. Since then the pair have
pushed higher, making a clear ascending channel, before starting to turn lower again. And as we head
into the second quarter of the year, EUR/USD is trading around a technically important area, which for
now looks likely that it will lead the pair lower. EUR/USD has closed, and more importantly opened,
below the recent trend support level and is now siting just above all three simple-moving averages
and the 23.6% Fibonacci retracement of the late-September 2022 to mid-July 2023 rally. A break
below 1.0787 opens the way to further losses down to the mid-February low just under 1.0700. Below
here, the October 2022 low at 1.0450 becomes the next target. Any move higher in EUR/USD will likely
be due to changes in the US dollar and market expectations of their upcoming rate cut cycle. Any
move higher in EUR/USD will find initial resistance around 1.0980. If this is broken with conviction, a
cluster of prior resistance levels between 1.1095 and 1.1139 will prove difficult to break.

EUR/USD Daily Price Chart

Source: TradingView, Prepared by Nick Cawley

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EUR/GBP
EUR/GBP is another pair that has been trading in a defined range over most of the first quarter.
Support around 0.8500 has held firm and promoted a sharp rebound during its two tests, while the
0.8550 area has seen a variety of highs and lows printed on either side. As we write, multi-month
resistance is being broken due to a current bout of Sterling weakness, and the 200-day SMA at 0.8606
and a prior set of highs around 0.8620 is set to come under pressure soon. In the short term, a move
above 0.8620 may well happen but with the CCI indicator showing the market in extremely overbought
territory, a period of consolidation is likely. While the path of least resistance remains pointed higher,
a move substantially higher - above 0.8700 - will struggle for traction. EUR/GBP looks set to trade
higher in Q2, but not noticeably.

EUR/GBP Daily Price Chart

Source: TradingView, Prepared by Nick Cawley

EUR/JPY
EUR/JPY has trended higher since the start of 2024 despite expectations that the European Central
Bank will cut rates and that the Bank of Japan will raise interest rates. Indeed, the EUR/JPY ascending
channel has been in place since May 2020 when the pair traded around 115, compared to a current

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spot price of 164. From a fundamental angle, EUR/JPY should start to turn lower in the second quarter
as the yield differential between the two currencies narrows. However, from a technical point of view,
the pair may move higher still. The weekly chart shows that the ascending channel remains in place
and the pair trade above all three simple moving averages. The CCI indicator suggests EUR/JPY is
starting to become overbought but is not yet close to the extreme levels seen in November last year.
EUR/JPY will likely range trade in the coming weeks before either fundamentals or technicals take
over and direct the next move.

EUR/JPY Weekly Price Chart

Source: TradingView, Prepared by Nick Cawley

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