CBA revised its EUR/USD projection from 1.10 to 1.05 as of end-March 2024 considering the outlook for interest rates and the Eurozone economy.

The euro continued to be pressured on Thursday (Dec 7), despite the US dollar being held back by market concerns ahead of tomorrow's US Nonfarm Payroll data release. EUR/USD was seen circulating in a very narrow range below 1.0800 as it entered the New York session, still buried at its lowest level in about two weeks.

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More Eurozone economic data supports the prospect of an early ECB rate cut next year. Eurostat reported that Gross Domestic Product (GDP) registered -0.1% in the third quarter, bringing annual growth from 0.6% to 0.0%.

Destatis also reported that Germany's industrial production slumped for the fifth consecutive month, while manufacturers' orders registered -3.7% in the period to October 2023. These figures reflect a very bad situation for Germany, given that the industrial sector is its main growth engine.

Most market participants now believe that the ECB will start cutting interest rates before mid-2024. In addition, analysts at several major banks cut their projections for the euro exchange rate going forward.

Commonwealth Bank of Australia (CBA) revised its EUR/USD projection from 1.10 to 1.05 by the end of March 2024. The reason is that "a weak Eurozone economy could weigh on EUR/USD".

The EUR/USD projection was also further lowered from 1.19 to 1.12 by the end of September, and then from 1.22 to 1.15 by the end of 2024. CBA still expects EUR/USD to strengthen slightly in the second half of next year as global market and economic conditions improve. However, the interest rate gap will remain bearish for EUR/USD as it is now.

"We expect interest rate differentials to remain a headwind for EUR/USD. We expect both the US FOMC and ECB to start a rate cutting cycle from around mid-2024. But with rate cuts occurring at roughly the same pace, the interest rate differential should not change much," explains Joseph Capurso, Head of International and Sustainable Economics at CBA.