EUR-USD forecast for 2023
2022.12.27 03:24
EUR-USD forecast for 2023
Budrigannews.com – The pair fell below parity once more in 2022, reaching a low of 0.9535 on September 28. This was not only the lowest level for the year but also the lowest level since more than 20 years earlier, in June 2002.
This year’s bearish move totaled over 1800 basis points between the beginning of the year, when the euro was worth around $1.135, and the low in late October.
However, the fourth quarter of 2022 has already seen a significant turnaround. On December 15, the EUR/USD reached a high of 1.0737, up more than 1200 pips from the annual low and reversing more than two-thirds of the decline that had occurred over the previous nine months in just six weeks.
The EUR/USD experienced its best monthly performance since July 2020 when it gained 10% in just November.
Through the end of September, the EUR/USD pair was heavily impacted by the strength of the, which increased this year in response to the rapid rise in rates of and was slower to tighten its policy in response to rising inflation.
The war in Ukraine and the energy crisis that followed have also had a much greater impact on the European economy than they have on the US economy, giving the dollar an additional advantage.
However, the situation is now different. Investors have rethought the pair because of the close connection between the Fed’s schedule slowdown and moderate inflation in the United States.
In point of fact, if the ECB trailed the Fed in terms of rate hikes in 2022, the situation could change in 2023, with the ECB “catching up” to the Fed, which has already clearly indicated a shift toward a less aggressive rate hike.
As a result, EUR/USD in 2023 will be largely influenced by market expectations of the Fed-ECB rate differential. In particular, the most important question in this regard for next year will be whether the Fed or the ECB will be the first to lower interest rates once more.
In this regard, UniCredit Forex strategist Roberto Mialich stated that “the Fed is set to cut rates in 2024 at a more intense pace than the ECB” and anticipates “a narrowing of the differential between the US Fed funds rate and the ECB depo rate, which will be consistent with a higher EUR-USD exchange rate.” Mialich was referring to the fact that “the Fed is set to cut rates in 2024 at a more intense pace than the ECB.”
“The strong dependence of the USD strength on the rise in US yields means that the greenback will be forced to loosen its grip as US yields fall again, as already occurred on the premise of the latest US CPI inflation data,” he continued.
However, economic developments, particularly the moderation of inflation and the impact of higher rates on growth, will continue to influence monetary policy at the Fed and the ECB.
Expectations of a rate increase for the concerned central bank should be lowered if inflation falls faster than anticipated in the coming months or years. On the other hand, rate expectations could rise if central bank action does not appear to be sufficient to bring inflation back to its target.
In a similar vein, a significant recession in 2023 would be a factor that would support a shift toward lower rate expectations and a conclusion to rate hikes sooner than anticipated.
The war in Ukraine is another potential “wild card” with two sides that should not be ignored. A significant bullish factor for EUR/USD could be the conflict’s eventual resolution in 2023.
However, if Russia decides to completely cut off its gas supplies to Europe, the war in Ukraine could worsen the economic impact on the continent. Analysts are probably going to talk about a return to below parity in that scenario.
Last but not least, looking at the chart, we can see that a signal that traders are paying close attention to and that appears to be coming may aid in the rise of the EUR/USD. Indeed, the 50-day moving average is rapidly approaching the 200-day moving average, as shown in the chart below.
A “golden cross” is a major bullish technical signal when the 50-day moving average crosses above the 200-day moving average. The last time this sign was recorded, toward the finish of June 2020, the EUR/USD consequently kept an addition of around 1150 pips in the accompanying a half year.
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At the end of July 2021, the opposite of this signal, a “death cross,” occurred when the 50-day MA crossed below the 200-day MA. In the subsequent 14 months, EUR/USD lost more than 2000 pips.
As a result, it will be important to keep an eye on how quickly the MM50 approaches the MM200 days between now and the end of 2022 and the beginning of 2023.
