Eur/usd: The euro is set to experience its first year of growth against the dollar since 2020

(BFM Bourse) – The euro rose back above $1.11 on Wednesday. Since October, the eurozone’s single currency has strengthened by almost 7% against the dollar.

After 2022, when the euro suffered against the dollar – the euro zone currency lost 6% against the dollar – many analysts were counting on a recovery of the currency of the monetary union against the royalties.

That should happen eventually. On Wednesday, the euro once again crossed the $1.11 mark, which it has not reached since last July. The currency was slightly down 0.1% at $1.1092 on Thursday afternoon. Its increase for the entire year 2023 is currently 3.7%. That would mark the first year in the green for the euro against the dollar since 2020, according to Bloomberg.

In particular, the euro has regained around 7% against the dollar since the October low. A significant increase in the foreign exchange market, where deviations are often limited (one currency “falls” against another when it loses more than 1% in a day), due to the huge volume that this market has experienced, with exchanges that can exceed $6,500 billion per day.

>> Get access to our exclusive graphical analyzes and gain insight into the trading portfolio

Expectations of more aggressive rate cuts for the Fed

This movement can be explained by the bundle of elements. Overall, the economic situation in the United States is better than in the euro zone, where Germany, the region’s leading economy, is expected to see its gross domestic product (GDP) contract by 0.5% this year, according to the IMF. projection, versus an expected increase of 2.1% for the United States.

Above all, with the drop in inflation on both sides of the Atlantic, investors began to expect a significant reduction in key rates by the two central banks, the European Central Bank (ECB) and the US Federal Reserve (Fed).

However, these expectations are proving more aggressive for the Fed. Investors here expect the US central bank to cut rates by 150 to 175 basis points, or 1.5 to 1.75 percentage points, in December 2024, according to data from CME Group’s Fedwatch tool. As an example for the ECB, Barclays is keeping its key rate cut by 125 basis points but until January 2025, with the refinancing operations rate rising from 4.5% to 2.25%. Goldman Sachs expects exactly the same range of rate cuts, with a rate of 2.25% “in early 2025.”

Safe harbor status of the dollar

That speculation was fueled by the slight difference in tone seen between Jerome Powell and Christine Lagarde, the presidents of the Fed and the ECB, during the two major central banks’ recent monetary policy meetings.

Jerome Powell appeared to slightly open the door to a rate cut by acknowledging that Fed members had discussed the possibility, with Christine Lagarde assuring that a rate cut was not mentioned by the ECB’s Monetary Policy Committee meeting.

The central banker also sent a tough message when he opined that members of the monetary institution should not let up in their fight against inflation. “The ECB’s restrictive tone supports the euro against the dollar,” agreed Bank of America in mid-December.

The final “kiss cool” effect is that the market has regained risk appetite in recent months, boosted by these expectations of key rate cuts. However, the dollar is considered a safe haven due to its status as a major currency in international trade.

This supports the dollar in a hot market. However, as investors regain confidence, this safe-haven status will reverse against the dollar in favor of other currencies considered riskier, such as the euro, but also emerging market currencies, all things being equal.

The limited potential of the euro?

So is the euro still under pressure against the dollar after this good end to the year? According to UBS, not so much.

The bank sees the euro-dollar pair hitting $1.10 next June and $1.12 a year after that. The Fed’s monetary policy committee “is more reactive than the ECB’s board of governors because of internal differences in the US labor market, which make it more dynamic than the eurozone market,” the Swiss bank analyzed.

“The US Federal Reserve has also been a prime mover in the rate hike cycle and we expect a similar pattern in terms of easing policy,” the institution continues. As a result, UBS believes the Fed will raise rates from spring 2024, while the ECB will wait until June. Which is certainly still likely to support the euro.

“However, the economic context in Europe is not favorable for the euro. In addition, the stagnation of global growth weighs on exports from the eurozone,” adds the Swiss bank.

Bank of America says economic statistics in the eurozone in the first quarter may have weighed on the eurozone currency. Bank of America expects the euro to be at $1.07 in the first quarter, then $1.10 in the second and $1.15 in the third and fourth.

“The euro appears overbought and with the German economy on the brink of collapse, the risk of a regional recession seems much higher in that country than in the United States,” said Helen Given of Monex USA, quoted by Bloomberg.

Julien Marion – ©2023 BFM Bourse

Leave a Comment