After plenty of indecisiveness throughout the first quarter of 2024 as US optimism for Fed rate cuts evaporated while European consumer confidence began to rise once again, we’ve seen plenty of flip-flopping from December’s peak of $1.1108 towards the $1.07 range and much action in-between. 

The euro is a far cry from its $1.5896 peak in July 2008, but has enjoyed a more solid recovery from its Q4 2023 lows of late, rebounding from $1.0471 to $1.08 territory. But now, as volatility between the pair picks up one again, it appears that consumers will have the final say on the short-term future of EUR/USD.
 

As March CPI inflation in the United States continues to confound expectations by rising to 3.5%, beyond its anticipated 3.4% level, while core CPI also fell above forecasts of 3.7%, reaching the 3.8% mark. 

This indicates that a clearing European outlook could see the currency build on its recovery against the dollar in 2024, but could we see the euro building momentum to push beyond $1.10 in the wake of continuing economic struggles in the US? 

Shifting FX Sentiment

As US CPI data continues to confound expectations, the Federal Reserve’s battle to contain inflation rates to its 2.0% target appears to be a losing one. 

The key issue here is that much of the dollar’s outperformance against the euro in early 2024 was built on market optimism that the Fed’s switch to a dovish monetary policy would see interest rate cuts sooner rather than later. 

With the US economy still evidently mired in a battle to control inflation, it’s clear that the domestic economic recovery will take considerably longer than more optimistic estimates had anticipated. 
 

At a hotter-than-expected CPI inflation rate of 3.5%, it’s becoming increasingly likely that the US Federal Reserve will hold interest rates in June, and this could have a complex impact on EUR/USD.

While higher rates adversely impact the cost of living and consumer spending, they can also attract more foreign capital inflows that would favor the interest offered by the dollar. 

In the immediacy of March’s CPI data release, EUR/USD tumbled 1%, illustrating the attraction of higher for longer interest rates throughout forex markets. 

The Return of European Optimism

While the US is bracing for a more drawn-out battle with inflation, the clearing skies over European markets appear to be drawing higher volumes of investor interest and consumer confidence. 

So far, 2024 has seen more investors buy European travel, retail, and luxury goods shares in anticipation of an economic rebound that will drive more consumer spending on holidays and expensive items. 

Since the start of February, automakers Renault and Stellantis have grown more than 25%, while German entertainment group Eventim is up 23% and Danish jewellery company Pandora has rallied 15% over the same period. 
 

The market upturns have come as institutions opted to bet that pessimism towards Europe’s economic growth has been exaggerated in recent months. 
 

While the United States have been struggling to contain inflation, the European outlook is far rosier, with eurozone forecasts standing at a far calmer 2.4% for March. 
 

“It does feel like we’re getting to the light at the end of the tunnel,” explained Dan Boardman-Weston, chief investment officer at BRI Wealth Management. “Consumer confidence has risen, granted from a very low base, and the European Central Bank is clearly expected to cut rates in June, which will provide more relief.”
 

This brightening market sentiment can also be positive for EUR/USD, with industries regaining strength and consumer confidence aiding the economic recovery throughout the region. 

Optimism for the recovering eurozone economy is shared among consumers, according to McKinsey data. However, the region still remains more pessimistic over its economic recovery compared to US consumers, weighing in at 23% as opposed to 38% among shoppers in the United States. 

What’s Next for EUR/USD?

As new data continues to impact the trading pair, we’re likely to see more volatility take center stage for now. 

Analysts appear divided on the prospects for each currency, with ING reporting that the dollar is currently underperforming in light of a strong US jobs report for March. 

With US inflation data suggesting that rate cuts in June may be fanciful, we could see the dollar strengthen with fresh inflows, while expectations of a more dovish European outlook may drive more dollar resilience. 

As uncertainty is expected to linger, institutional FX players may benefit from utlizing more low latency forex tools and liquidity aggregated from locally connected LPs throughout strategically positioned data centers. With the recent market movements off the back of US CPI inflation data, EUR/USD appears ready to fluctuate quickly. 

While confounding inflation data will always drive a short-term impact on market performance, the wider European markets revival could drive greater long-term optimism throughout the eurozone. 

With unpredictability taking hold in the US, and blue skies appearing to emerge in Europe, there’s no reason why short-term volatility can’t give way to stronger EUR/USD upward trends as the year progresses. 

EUR/USD has seen a steady decline following a bullish S&P500 driven by a generative AI boom and supplemented by the expectation of upcoming Federal rate cuts in the US. Now, as a resurgence in consumer spending begins to enter European markets, can we see the Euro's lost ground become recaptured?