30.12.202401:23 Forex Analysis & Reviews: EUR/USD. Year in Review: Rollercoasters, Black Monday, and Trump's Victory

The EUR/USD pair closed Friday's trading at 1.0427, marking the end of the last trading week of 2024. As the year comes to a close, it's time to reflect on some key outcomes.

The net profit for EUR/USD sellers this year stands at 600 pips. On January 1, the pair opened trading at 1.1037. For nearly seven months—from January to August—the pair fluctuated within a 400-pip range, between 1.0650 and 1.1050. This period was marked by alternating upward and downward movements, creating a consistent cycle of volatility—a true rollercoaster experience.

Throughout the year, dollar bulls remained relatively confident as the Federal Reserve adopted a wait-and-see strategy. Dovish market expectations fluctuated multiple times. In December 2023 and January 2024, most market participants anticipated a rate cut at the March Fed meeting. However, by February, it became evident that inflation would prevent the central bank from acting so quickly. The dollar gained favor briefly until expectations shifted toward a potential cut in June. Yet, spring inflation reports pushed this timeline further back, with some analysts forecasting that rate cuts would not begin until 2025.

The narrative changed dramatically in August with "Black Monday," a global stock market crash that originated on the Tokyo Stock Exchange, where the Nikkei index hit a record low not seen since the Black Monday crash of 1987. This triggered a domino effect, leading to plummeting indices across Asia, Europe, and the United States.

The crash was anticipated due to several factors, including overly optimistic expectations for artificial intelligence (AI), which had attracted significant investments. Disappointing half-year reports from leading tech companies such as Apple, Intel, and Amazon contributed to the negative sentiment.

Additionally, July's weak Nonfarm Payrolls (NFP) report, which revealed an unexpectedly slow pace of job growth and rising unemployment, heightened concerns. The ISM Manufacturing Index, released a day earlier, fell to 46.8, the lowest level since November 2023. These developments increased fears of a recession in the U.S., with critics blaming the Fed for failing to take advantage of the optimal opportunity to ease monetary policy. Dovish expectations have increased significantly, the dollar has come under significant pressure.

Compounding the dollar's challenges, inflation data reflected a consistent decline. By August, the Consumer Price Index (CPI) had decreased from 3.4% in March to 2.5% in August and further to 2.4% in September, establishing a clear downward trend.

Political events in the United States also put additional pressure on the greenback. In August, Kamala Harris announced her candidacy for the U.S. presidency, raising questions about Donald Trump's previously dominant position. A month earlier, Trump's approval ratings had surged following a failed assassination attempt and President Biden's poor debate performance. However, Harris's entry into the race diminished market confidence in a Trump victory, contributing to increased market uncertainty.

In other words, August saw a turning point "on all fronts": weak Nonfarms, "Black Monday", Kamala Harris, slowing inflation. The market started talking about the fact that at the beginning of autumn the Fed would resort to a 50-point reduction in the interest rate. Following these developments, the EUR/USD exchange rate surged into the 1.12 range, reaching a peak of 1.1214 for the year.

However, this rally was short-lived. Already in October, the scales began to tilt back in favor of the U.S. currency. First, Harris's campaign stalled. Harris's campaign began to lose momentum in swing states, while Trump regained support, making up for lost time. Second, inflation began to accelerate in the US. In September, the overall CPI marked its yearly low (2.4% y/y), after which the index began to rise consistently. So did the producer price index. Another inflation indicator, which is the most important for the Fed, the core Personal Consumption Expenditures (PCE) index, also turned towards growth. Slowly but surely it began to climb upward. In addition, in October, almost all components of Nonfarm Payrolls came out in the green zone, reflecting the growth of the U.S. labor market. The release surpassed even the wildest forecasts, giving the greenback the strongest support.

In other words, nearly all the fundamental factors that had supported EUR/USD buyers turned against them. Inflation began to accelerate, the labor market heated up, and the Fed's rhetoric became increasingly hawkish. The pair reversed course, plunged below the 1.1000 level, and has not returned to the 1.10 range since. Starting in October, the pair has been steadily declining, exhibiting a clear downward trend.

The "climax of climaxes" occurred with Trump's victory in the U.S. presidential election. The outcome was uncertain, as the candidates were closely matched, keeping the suspense alive until the very end. In response to the election results, the EUR/USD currency pair fell to a new yearly low of 1.0334. To further complicate matters, Fed Chair Jerome Powell indicated a slowdown in the pace of interest rate cuts. During its December meeting, the Fed confirmed this outlook, adopting a more cautious approach to easing monetary policy due to the election results and ongoing economic uncertainties.

Trump's victory is not just a story about 2024 but also about the year that follows—2025. Although the market reacted to his election, it has since calmed down in anticipation of what's to come. The inauguration of the 47th President of the United States is scheduled for January 20, indicating that "the real action" will begin in early 2025. Based on Trump's recent statements—including mentions of the "annexation" of Canada, claims to territory in Denmark, the "return" of the Panama Canal, and plans for trade wars with China, the EU, and Mexico—it seems we are indeed headed for interesting times. However, that is a story for another time.