Euro is moving towards 1.10 level

01/09/2023

2 minutes read

2023.01.09 12:38

The euro is flying high, having gained nearly 2% since Thursday. climbed to 1.0731 earlier today, its highest level in a month.

In December, Germany and other members of the eurozone saw lower inflation, and eurozone inflation was anticipated to soften as well. The magnitude of the decline—from 10.1% to 9.2%—was unexpected because it was below the estimate of 9.7%. On Friday, this resulted in a sharp rise in the euro.

A decline in oil prices, energy subsidies, and inflation were the primary factors. Although it is becoming increasingly likely that inflation has already reached its peak, the road to the 2% target will undoubtedly be long.

According to the most recent estimate from the ECB, inflation won’t reach this goal until 2025. Another caveat is that, contrary to the forecast, core inflation actually increased to 5.2% in December. The European Central Bank (ECB) is likely to remain hawkish in the first quarter due to persistent core inflation, and rate increases of 50 basis points are likely in February and March.

In January, the Sentix Investor Confidence index for the eurozone increased by 3.5 points for the third consecutive month. With hopes that the reopening in China will boost the economy of the eurozone, investor expectations rose. Nevertheless, with -17.5 points, the index is stuck in negative territory.

On a busy Friday, the data were mixed in the US. The number of nonfarm payrolls was 223,000, which was higher than the expected 203,000 but down from 256,000. Investors chose to focus on the soft releases because this was a decent release.

Earnings per hour increased by 4.6%, well below the estimate of 5.0% and the prior reading of 4.8%. Additionally, for the first time since May 2020, the ISM Services PMI entered contraction territory. The index fell to 49.6, a significant decrease from the forecast of 55.5 and 56.5.

More Nonfarm payrolls to set the tone for US dollar in new year

The Fed may be forced to reconsider its aggressive rate policy and even cut rates late in the year as a result of the decline in wage growth and weaker services activity. The US dollar has fallen across the board as a result of this increased appetite for risk.