Last year, the euro crossed a psychological barrier in the financial markets after it plummeted below parity with the U.S. dollar and fell to its lowest level in about 20 years. From inflation to an energy crisis to recession fears, investors were ultra-bearish on the currency.
In the first few weeks of 2023, however, the euro has been building on the momentum that started in November. The euro has soared more than 10 percent in the past three months. Year to date, the euro has risen roughly 1 percent against the U.S. dollar.
The euro has been benefiting from a milder winter in Europe, according to Ipek Ozkardeskaya, senior analyst at Swissquote Bank. That’s eased the European energy crisis and diminished Russian President Vladimir Putin’s advantage over the region.
Should warmer-than-usual weather conditions persist, this could buy Europe time to continue building reserves and reducing reliance on Moscow. Moreover, if it does extend European nations another year, it could prevent a crisis if next year’s season turns out to be brutal.
In addition, a significant drop in natural gas prices has helped the situation. The natural gas market has tanked, falling nearly 23 percent since the beginning of the new year. Traders have been selling the so-called bridge fuel in mild winter weather in both North America and Europe.
The European Economy
The other factor has been better-than-expected economic data coming out of Europe.The European Central Bank (ECB) is weighing smaller rate hikes next month, effectively preventing a “Volcker shock,” says ECB governing council member Olli Rehn. This is a reference to former Federal Reserve Chair Paul Volcker, who raised the benchmark fed funds rate by double digits to fight inflation in the 1980s.
“Policy rates will still have to rise significantly to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2 percent medium-term target,” he said. “We will stay the course. Ceteris paribus [other things equal]—this means significant rate hikes in the following meetings. But the near term is shrouded in uncertainty, and we need to keep an open mind to adjust our policies if needed.”
China’s reopening could also play an important role for both the European economy and the euro.
“While the euro ended 2022 on a positive note, 2023 has brought in more good news following China’s reopening and reduction in gas prices, raising hopes for Europe’s economic outlook,” Kunal Sawhney, CEO of equity research firm Kalkine Group, told The Epoch Times.
The US Dollar
The U.S. Dollar Index (DXY), which gauges the greenback against a basket of currencies, had an impressive 2022, rallying about 9 percent. But the index has been heading downward since November 2022, falling nearly 10 percent. Year to date, the DXY has slumped close to 2 percent.With expectations that the Federal Reserve is close to finishing its quantitative-tightening cycle, investors have fled the conventional safe-haven asset and turned modestly bullish on equities again. As a result, the leading stock market indexes have rebounded so far in January, led by the Nasdaq Composite Index’s 6 percent gain.
There’s also growing optimism that global economic growth will be less anemic, supporting a broad array of other currencies, including the euro, the New Zealand dollar, and the Canadian dollar.
Where Is the Euro Heading?
A growing number of market analysts have modified their euro forecasts for the upcoming year amid the latest developments in the global financial markets.ING analysts anticipate the euro–U.S. dollar exchange rate will rise to around 1.15 this year.
“Minor euro dips to the 1.08 area remain well-supported and price action appears to be carving out a short-term consolidation ahead of another push higher (bull flag/wedge pattern on the intraday chart),” he wrote in a note. “Momentum remains bullish, limiting euro losses and pointing to further gains. Support is 1.0775/00. Resistance (bull trigger) is 1.0870/75.”
The euro–dollar exchange rate rose 0.85 percent, to 1.0881 on Jan. 18, up from 1.0790.