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Negotiated wage settlements in the Eurozone have peaked and will come down over the following months, opening the door to "earlier" interest rate cuts at the European Central Bank (ECB), which HSBC says will weigh on Euro-Dollar.

The ECB's latest Negotiated Wages assessment showed that negotiated pay rose 4.5% at the end of 2023. These data form a key tool ECB policymakers utilise when considering the outlook for wage changes and the likely impact on inflation.

Viraj Patel, an analyst at Vanda Research, says Eurozone negotiated wages are starting to roll over, with the peak being the third quarter of 2023.

"The most likely path is lower as EZ core inflationary pressures ease. Door for earlier ECB rate cuts remains wide open assuming price pressures remain subdued in Q1," says Patel.

The ECB has said it won't consider cutting interest rates until it has more clarity on the state of wage pressures in the first part of the year. Policymakers want to see wages fall in a manner consistent with inflation falling back to the 2.0% target on a sustained basis.

Markets see a decent chance of the first rate cut coming in May with a cut by June being fully priced.

HSBC says it expects the start of the rate-cutting cycles in 2024 to be mildly negative for EUR/USD, even if cuts are priced in by markets.

"We identify six rate-cutting cycles since the ECB’s inception. The average performance of EURUSD during these cycles was -5.2%," says Dominic Bunning, Head of European FX Research at HSBC.

HSBC cautions that the biggest declines in Euro happen when ECB rate cuts accompany idiosyncratic concerns for the Eurozone, as was the case in the cutting cycles of the 2010s.

"We do not envisage a similar scenario in 2024," says Bunning, who envisages "modest downside".