Last week's trading was generally positive for the course of the exchange rate of the euro currency pair against the US dollar, EUR/USD, as it recorded gains. There was also retracement towards the 1.0867 resistance level, the highest for the currency pair in months, and closed the week's trading around the 1.0830 level. The easing of fears about the energy future in the eurozone contributed to the recent gains of the euro-dollar.
EUR/USD Outlook
Barclays raised its forecast for the EUR/USD exchange rate in 2023 but warns that the pair may end the first quarter below current levels. Accordingly, analysts at the investment bank say that they have raised their forecasts for the euro against the dollar against the dollar, EUR/USD, based on expectations of a decline in gas prices, the reopening of the Chinese economy and the maturity of the tightening cycle of the US Federal Reserve. The forecast comes amid continued outperformance in EUR/USD which is up 1.30% in 2023, adding to its advance of 12% from September 26 lows of 0.9543 to a year-end close of 1.0660. The price of the euro / dollar is now around its highest level since April 2022.
Certainly, the rally is mainly driven by a significant reassessment of the growth outlook in the Eurozone in light of lower gas prices and higher levels of gas storage. Accordingly, Themistocles Viotakis, head of forex research at Barclays, says: “It is remarkable that natural gas prices have reached pre-war levels in Ukraine thanks to a mild winter, which indicates a decrease in the energy risk premium for the euro but also skews the risk to the upside.”
But the underlying economic improvements come along with communications from the European Central Bank (ECB) that at least two additional interest rates of 50 basis points will be delivered in early 2023 in order to bring inflation back under control. “The recent hawkish ECB pivot should support the upside in the medium term,” the analyst added.
This means more hikes will come from the ECB than the Fed in 2023: following the release of inflation data on January 12, markets are now seeing a 25 basis point rally in February and speculation has risen that this could be the last of the cycle. But more importantly, financial markets are now pricing in around 150 basis points for interest rate cuts by the first half of 2024, far exceeding the roughly 50 basis points expected by the ECB in that period.
In short, the dynamics of interest rates are particularly bullish for the euro and the dollar.
But Barclays says its outlook upgrades still reflect risks of rising gas prices again and threaten sentiment on the prospects for recovery in the eurozone. Barclays now holds a forecast for EUR/USD at 1.04 for the end of the first quarter, which indicates some bounce over the coming weeks as there are "near-term upsides".
There are other near-term downside risks for the Fed: Although it looks like it will slow the pace of US rate hikes, it could show dissatisfaction with the decline in US yields, effectively easing monetary conditions. The Fed may judge that with core inflation remaining near high levels, the cost of money is falling too quickly, too soon. But after the first quarter, the gates are open for a more lasting recovery for the euro and the dollar.
Accordingly, Barclays analysts added. We raised our EUR/USD forecast to 1.12 by the end of 23 (from 1.05) thanks to a faster exit from the no-COVID situation in China and a maturing tightening cycle by the Fed given signs that inflation in the US has peaked.
EUR/USD Forecast:
- According to the performance on the daily timeframe chart, the general trend of the EUR/USD pair is still bullish.
- A first break of the trend will not occur without moving below the support level 1.0690.
- On the other hand, the currency pair moved towards the resistance level 1.0930, which will support the strength of the bulls’ control over the trend, and at the same time move the indicators.
- The technical direction towards overbought levels.
At that time, I expect profit-taking sales to begin. I expect a quiet start for the euro-dollar pair in light of the American holiday.
Ready to trade our Forex daily forecast? We’ve listed the best regulated forex brokers for you.
