The eurozone’s economic recovery is marked by a sluggish pace, exacerbated by regional disparitiesThis slow revival alongside an increased likelihood of the European Central Bank (ECB) ramping up its policy easing could weaken the euro's competitive edge in the global marketExternal risks are also on the rise, raising the probability of heightened fluctuations in the euro's valueAll these factors are expected to exert considerable pressure on the euro heading into 2025, with predictions suggesting that the euro could trade near parity with the US dollar.

As we reflect on 2024, it becomes apparent that the euro displayed a generally weak and volatile trend, characterized by three distinct phases throughout the yearThe first phase stretched from the beginning of the year until mid-April, during which market transactions were driven by the diverging expectations of monetary policies in Europe and the USIn January, the eurozone's manufacturing Purchasing Managers' Index (PMI) remained in a contraction zone for 18 consecutive months, while the GDP growth rate for the fourth quarter of 2023 showed two consecutive quarters of negative growthConcurrently, the dovish sentiments from the ECB reinforced market expectations of the euro’s weakness, resulting in a decline in the euro's value against the dollar from 1.10 at the start of the year to around 1.08 by April.

In February, bolstered by a stronger dollar, the euro's volatility increased, but it remained weak overallMarch saw the ECB hold its stance, continuing the dovish discourse, while the Swiss National Bank made the first move to cut interest rates, contributing to a further decline in euro-denominated currencies, including the euro itselfApril brought no change for the ECB in interest rates at its fifth consecutive meeting, with a clear signal of potential rate cuts in June

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As geopolitical tensions provided safe-haven value to the dollar, the euro descended further, hitting a five-month low of 1.06.

The second phase, extending from mid-April to the end of September, was marked by contrasting economic fundamentals in the EU and the USStarting in late April, data from the US showed marginal weakness while the eurozone’s PMI exceeded expectations, leading to a positive quarter for GDP with its third-quarter performance displaying a recovery from a technical recessionThis convergence in economic expectations led to a swift rebound in the euroIn June, the ECB followed through on its plans, reducing its key interest rates by 25 basis points, thus ending the tightening cycle that began in July 2022. Despite brief setbacks due to uncertainty in the French political landscape, the overall trend remained on an upward trajectory.

The third phase from early October until year-end showcased a return to ECB easing, as the bank cut rates for the third consecutive timeEuro background volatility resurfaced in response to this divergence in monetary policiesThe French government faced a hiccup when its 2025 budget plan was turned down, escalating political tensions and pushing the euro down to 1.03 against the dollar—a low it hadn't seen in two yearsDecember saw simultaneous rate cuts from the ECB and the Fed; however, the Fed's hawkish outlook on future rate cuts exerted additional pressure on the euro.

Zooming out over the full year, several defining characteristics emerged concerning the euro’s movementFirstly, volatility was comparatively diminished compared to prior yearsSecondly, the euro's valuation heavily depended on the anticipated monetary policies of both the ECB and the FedLastly, the euro's performance against other major currencies was notably stronger in the first half of the year than in the latter half.

Examining the leading factors influencing the euro, data from the eurozone in 2024 painted a picture of an early-year slump followed by a mid-year recovery, and concluding with another late-year downturn

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The eurozone's overall PMI finally broke free from months of contraction starting in March, pointing to signs of recoveryNonetheless, from June onward, this index began to wane again, remaining under the threshold of expansion through the year's endParticularly, Germany, the eurozone's largest economy, suffered an ongoing decline in both industrial output and manufacturing PMI, significantly dragging down the broader eurozone data.

In the second quarter of 2024, eurozone GDP growth was slightly recalibrated to show a modest upward trend, albeit still suffering from Germany’s growth inadequaciesConversely, the third quarter revealed unexpected growth in the eurozone and its largest economies, Germany and France, primarily driven by increased household and government consumptionFrance enjoyed a boost in consumption and public spending ahead of the Olympic GamesOverall market concerns about the eurozone economy eased somewhat, although the persistent increase in government deficits flagged potential risks.

Inflation trends for the eurozone consistently declined from the start of the year through September, but after hitting the ECB's target of 2%, inflation surged again in October and November due to soaring service prices and rapid wage growthThe recent rise of far-right political forces across EU member states has compounded challenges for mainstream political entities, consequently fragmenting the political landscape and eroding the influence of Germany and France in EU mattersThe escalation of political disputes, exemplified by the cabinet resignations and growing concerns about government budgets, has placed added pressure on the euro.

The ECB implemented its first rate cuts in five years in 2024, reducing rates three times by 25 basis points each time, align with the declining economic indicatorsHowever, statements surrounding the ECB's policy highlighted a cautious and data-driven approach regarding future rate cuts amid economic uncertainties and inflation challenges, emphasizing the need to maintain flexibility based on trends.

Looking ahead to 2025, the fundamental economic landscape of the eurozone, adjustments made by the ECB, and external uncertainties will all play pivotal roles in guiding the euro's performance

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The slow pace of recovery will result in increased divergence across regions within the eurozoneAs predicted, economic growth for the eurozone in 2025 is set at 1.3%, a slight improvement over 2024, yet substantially downgraded due to disappointing performances from Germany and a visible weakness in consumer spending.

The ECB's inclination towards accelerated policy easing will further hamper the euro’s competitive positioningHistory shows that as the ECB has cut rates incrementally during 2024—culminating in a cumulative 100 basis points drop—there's a consistent shift in monetary policy conditions compared to the FedConsequently, this pressure may lead to a rise in the euro-dollar exchange rate nearing parity in 2025—it is crucial to note that such trends are influenced by economic data releases, inflation contexts, and geopolitical factors.

External risks are also heightened, amplifying the euro's potential volatilityThe evolving dynamics of global conflict and tariff policies loom large as significant threatsA genuine tariff threat could adversely affect eurozone export strength, employment numbers, and overall investment levels—consequently pressuring the euro's market price further downAdditionally, Europe’s reliance on external energy sources remains a concern, one that may exert additional upward pressure on inflation if geopolitical tensions escalate.

Technical analyses indicate the euro against the dollar continues in its downward trajectory since early 2023. Following a sharp retreat from upper channel lines in September 2024, the euro is currently navigating below crucial support levels, suggesting that this bearish channel trend is likely to persist into 2025.

In conclusion, prediction models indicate that the euro may face substantial downward pressures throughout 2025, particularly during the uncertain initial phases of the year

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