Euro's optimism grows among financial specialists as Europe braces for recession avoidance
The EUR/USD exchange rate is currently trading within a range, with a bearish-to-neutral sentiment, influenced by the monetary policy shifts of both the Federal Reserve (Fed) in the United States and the European Central Bank (ECB) in Frankfurt.
According to analysts like Steve Englander, head of international G-10 FX research study at Criterion Chartered, and George Saravelos, Deutsche Bank's Head of FX Study, the euro remains pressured due to lackluster Eurozone growth and potential dovish signals from the ECB, while the U.S. dollar shows some signs of weakness as market expectations lean toward a Fed rate cut or slower tightening.
The EUR/USD pair is currently near 1.165–1.1715, with forecast ranges roughly between support around 1.1500–1.1620 and resistance near 1.1700–1.1800. Despite some attempts at short-term bullish correction and testing resistance near 1.1695, technical indicators like RSI suggest a likely rebound downwards and continuation of the euro’s decline unless the pair breaks decisively above ~1.1775.
Central to the euro’s weakness in 2022 was aggressive monetary policy tightening from the U.S. Federal Reserve while the ECB was slower to raise interest rates. However, the recent outlook has changed, with the Federal Reserve's potential easing or pause in rate hikes leading to some dollar weakening, which tempers downward pressure on EUR/USD.
Analysts Steve Englander and George Saravelos emphasize that while the Fed may cool rate hikes, the hawkish tone from Frankfurt could limit euro gains and maintain volatility in EUR/USD. ECB policymaker Robert Holzmann stated that interest rates will have to rise significantly more to reach levels that are completely restrictive to ensure a prompt return of inflation to the 2% medium-term target.
The prospect of a "Fed pivot" (a shift in Fed's aggressive rate hiking policy) is seen as a potential catalyst for a stronger euro. Steve Englander mentioned that the economic data surprises in the U.S. have been "middling to weaker" than in Europe, indicating less upward pressure on prices.
In Europe, current PMI numbers suggest there may not be a recession this winter, unemployment is still declining, and financial policy is structurally easy. Deutsche Bank's George Saravelos expects EUR/USD to reach 1.10 by Q2 and 1.15 by year-end, predicting a decline in the US dollar.
Other factors influencing the EUR/USD exchange rate include the ongoing energy shock in Europe, China's shift away from a zero-Covid policy, and the debt ceiling poses downside risks to US monetary policy this year. Tight monetary policy is a headwind to global growth, but China's reopening could provide a boost to the euro as it is a pro-cyclical currency and turning points over the years have coincided with a turn in the external growth cycle.
In conclusion, the EUR/USD pair is expected to trade within a range with a slight bearish bias unless stronger eurozone growth data or more dovish ECB messaging emerges to balance the recent hawkishness, while U.S. Fed policies remain closely watched for signals of a less aggressive stance.
The potential weakening of the U.S. dollar due to a possible Fed rate cut or slower tightening (investing) could provide an opportunity for businesses (finance) to explore investing in stronger-performing European markets, given the current euro's decline (food for thought, perhaps for restaurateurs considering overseas expansion). On the other hand, the hawkish tone from Frankfurt and the anticipated significant rise in ECB interest rates (finance) might are expected to curb potential euro gains (food) and maintain volatility in the EUR/USD exchange rate (business).
