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EUR/USD currently carries a 2% risk premium.
Based on our judgment on the policy trajectory of the Federal Reserve and the European Central Bank, EUR/USD will still rise to the 1.18 area in the second half of 2024. However, as we have seen many times, policy rate differentials are not the only driver of EUR/USD.
Currently, we estimate that EUR/USD carries a risk premium of 2% – which could extend to 6% during a period of extreme stress in the Eurozone.
The low growth environment in the Eurozone and political uncertainty over the reintroduction of the Stability and Growth Pact will keep the euro at this risk premium, meaning EUR/USD will end the year close to 1.06, with optimal levels in 2024 likely to be closer to 1.15 , instead of 1.18.
