EUR/USD forecast: Will euro rise continue?
The euro (EUR) to US dollar (USD) exchange rate has risen close to 9% over the past three months on the back of moderately improved economic sentiment in the eurozone, as well as the slowing of interest rate hikes by the US Federal Reserve (Fed), which has reduced the greenback’s appeal as a safe haven.
A softening of the Fed’s policy in mid-December supported the euro – both the ECB and the US central bank have reiterated their resolve in tackling inflation, saying there are more rate hikes to come.
As of 28 December 2022, EUR/USD was trading at $1.064, close to levels not seen in near five months.
Despite its recent gains, the EUR/USD currency pair has nevertheless declined 6% year-to-date (YTD).
EUR/USD Live Exchange Rate Chart.
30m 1h 4h 1d 1w.
Here we look at the factors driving the currency pair and the euro to dollar forecast for 2023 and beyond. What lies ahead for EUR/USD, as it continues to trade around the parity level?
How has EUR/USD traded in 2022 so far?
After falling from $1.2275 at the start of 2021, EUR/USD started 2022 at $1.1375. The pair rose to a high of $1.1495 in early February before steadily dropping to a low of $1.0380 on 13 May – a level last seen in January 2022.
From that low point, the price rose to $1.0790 at the start of June before taking another peg lower to $1.04. EUR/USD briefly breached parity on 13 July 2022, as markets reacted to US inflation figures. That was followed by an immediate rebound that sent the pair back above $1.0100.
On 5 September 2022, the pair dipped below the $0.99 level for the first time in two decades as Russia shut down its main gas pipeline to the EU, further destabilising the economic outlook in the eurozone.
EUR/USD then went on a brief rally influenced by the ECB’s interest rate decision on 8 September, which sent the ECB’s three key interest rates – on main refinancing operations, the marginal lending facility and the deposit facility – to 1.25%, 1.50% and 0.75% respectively.
The pair peaked at $1.0317 on 12 September 2022 before sharply declining to trade at around parity.
It briefly rose back over the $1 mark on 16 September and for the next few days, before falling below parity once again. On 27 September 2022 EUR/USD fell to its lowest point of the year so far at $0.95892. However, it rebounded again a month later, rising back above parity on 26 October.
The ECB’s interest rate decision on 27 October did little to support the euro, with the currency falling below parity up until 3 November.
A weaker dollar and falling US Treasury yields have since driven the EUR/USD currency pair back up to trade around the $1.06 level.
EUR/USD has benefited from a general dollar weakness as inflationary pressures in the US continue to ease, while the ECB lifted interest rates by 50 basis points last week as expected, reiterating that more hikes will follow and outlined plans for quantitative tightening.
The fresh Purchasing Managers’ Index (PMI) data for December showed private sector activity in the Euro area shrank at the slowest pace in four months, which could suggest the impending recession in the EU could be less severe than previously anticipated.
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What has been driving the euro?
Inflation and slowing growth.
The Russian invasion of Ukraine has hurt demand for the euro. The war in Eastern Europe has hit the eurozone economy hard and dampened the economic outlook significantly.
Europe relies heavily on Russian energy – oil and gas – and food from Ukraine. The war, along with Western sanctions on Moscow, has sent energy and food prices spiralling. Exports have been blocked, and the West is attempting to reduce its reliance on Russian oil and gas, with the EU approving a phased-in ban on Russian oil products over the coming six months.
The result has been inflation in the region rising to record levels, while simultaneously hurting the growth outlook.
Euro area inflation, as measured by consumer prices, was expected to fall to 10% year-over-year (YOY) in November – down from 10.6% in October 2022.
Energy prices have been a major contributor to the rise in inflation – energy is expected to have the highest annual rate in November (34.9% compared with 41.5% in October), followed by food, alcohol and tobacco (13.6%, compared with 13.1% in October).
Russian gas crisis.
The euro dipped below the 99-cent mark on 5 September as Russia ramped up the continent’s energy crisis by shutting off its main gas pipeline to Europe, Nord Stream 1, thus setting the stage for a cold winter ahead in the region.
The gas halt “is another blow to the European economic outlook, which has left the euro weak in the near term due to governance-related risks”, Piet Haines Christiansen, chief strategist at Danske Bank in Copenhagen, told Bloomberg on 4 September.
“At the same time, yet another stimuli package from Germany is an attempt to keep growth afloat, which makes inflation forecasting and the job for the ECB more tricky.”
Prior to the shutdown, Germany unveiled a relief plan on 4 September worth about €65bn.
Finland has also said it would stabilise its power market with a $10bn ($9.95bn) relief programme. On 3 September, Sweden announced $23bn in liquidity guarantees for its utility firms as it seeks to fend off a broader financial crisis.
“This has had the ingredients for a kind of a Lehman Brothers of the energy industry,” Finnish economic affairs minister Mika Lintila said on 4 September.
Finland’s prime minister Sanna Marin said during a news conference: “The government’s programme is a last-resort financing option for companies that would otherwise be threatened with insolvency.”
ECB’s hawkish stance.
Rising inflation has pushed the ECB to adopt a more hawkish stance. In an ECB meeting in June, the bank made the unusual step of pre-committing to interest rate hikes in July and September.
However, the EUR remains under pressure, mainly because of the deteriorating outlook for the eurozone economy. Despite the recent softening of its monetary policy stance, the Fed, which has so far been more aggressive in implementing contractionary monetary policy, can be said to exert more influence over the EUR/USD rate than the ECB.
“Monetary policy in the US still drives the euro more at this stage than the European Central Bank does,” Dirk Schumacher, head of Europe macro research at Natixis, explained to the Financial Times on 14 July. “The Fed is the main driver of the euro.”
On 21 July, the ECB raised all three key interest rates by 50bps for the first time in over a decade, exceeding market expectations and breaking its own guidance for a 25bp move.
At its next meeting on 8 September, the bank adopted an even more hawkish stance, choosing to ramp up all three key interest rates by 75bps – a move that mostly fell in line with market expectations.
The bank raised interest rates by a further 75bps at its meeting at the end of October. The move, widely expected by markets, marked the second increase of this kind in a row and brought borrowing costs up to their highest level since the beginning of 2009. The ECB refinancing rate is now 2%, the deposit rate is 1.5%, and the marginal lending rate is 2.25%.
The ECB raised the three rates by 50bps during its last monetary policy meeting of 2022 on 15 December, marking a fourth rate increase – the rise took the deposit facility to 2%, the refinancing rate to 2.5% and the marginal lending to 2.75%, a level not seen in 14 years.
According to a press release by the ECB, the bank will continue to take aggressive measures to fight inflation, which could indicate potential support for the euro:
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“The Governing Council today decided to raise the three key ECB interest rates by 50 basis points and, based on the substantial upward revision to the inflation outlook, expects to raise them further. In particular, the Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target. Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations.
“The euro area economy may contract in the current quarter and the next quarter, owing to the energy crisis, high uncertainty, weakening global economic activity and tighter financing conditions. According to the latest Eurosystem staff projections, a recession would be relatively short-lived and shallow. Growth is nonetheless expected to be subdued next year and has been revised down significantly compared with the previous projections. Beyond the near term, growth is projected to recover as the current headwinds fade. Overall, the Eurosystem staff projections now see the economy growing by 3.4% in 2022, 0.5% in 2023, 1.9% in 2024 and 1.8% in 2025.”
What has been driving the USD?
Safe haven.
The US dollar has been steadily strengthening across the board. The US dollar index (DXY), which measures the USD versus a basket of currencies, has rallied close to 9% this year, peaking at 114 in late September.
The USD has benefited from its safe-haven status as demand for the greenback rose following Russia’s invasion of Ukraine.
Since then, safe-haven flows have largely continued as fears of slowing global growth and stagflation have ramped up, despite a recent pullback triggered by a potential slowing of the monetary contraction cycle in the US.
While Europe could be more likely to experience a recession than the US, given its proximity to the war in Ukraine and its dependence on Russian gas, there is also a rising possibility of a recession across the Atlantic.
Hawkish US Federal Reserve.
The dollar has also benefited from a hawkish Federal Reserve, particularly in comparison to the ECB.
As inflation in the US rose to a 40-year high, the Fed quickly ended its bond-buying programme and started a rate-hiking cycle. In March’s Federal Open Market Committee (FOMC) meeting the Fed raised interest rates by 25bps, followed by a 50-point hike in May.
The Fed then raised interest rates by a further 75bps in four consecutive meetings on 16 June, 27 July, 21 September and 2 November, lifting the benchmark overnight borrowing rate to a range of 3.75%–4%.
In a press conference on 21 September, Federal Reserve chair Jerome Powell reiterated that the US central bank would continue to “move [their] policy stance purposefully” in order to achieve 2% inflation, adding that he anticipated “ongoing increases will be appropriate”.
Powell’s speech came across as a direct sign of the Fed’s intent to bring inflation in the US under control, further boosting the dollar against most major rivals and denting the market’s appetite for other safe-haven assets, such as gold and silver.
On 14 December, however, the Fed slowed down its pace of rate hikes, boosting the overnight borrowing rate by half a percentage point, taking it to a targeted range between 4.25% and 4.5% – a move that was widely expected by markets. The Fed also indicated that it expects to keep rates higher through next year, with no reductions until 2024.
As Greg McBride, chief analyst at Bankrate, recently told CNBC :
“We still have a long way to go. We could see a meaningful drop in inflation in 2023, and still only be halfway to where we need to be by this time next year.”
The USD could potentially start to ease lower once peak inflation has passed in the US. CPI most recently came in at 7.1% YOY in November – the “smallest 12-month increase since the period ending December 2021”, according to the US Bureau of Labor Statistics.
The figure indicates a slowdown of inflation in the US, but the rate of price increases still remains way off the Fed’s target, meaning the end of the monetary contraction cycle could still be some time away.
EUR/USD forecasts: 2023 and beyond.
As inflation and recession fears escalate, and with central bank action very much in focus, let’s look at where analysts’ EUR/USD predictions are. Is there any sign of a sustained turnaround for the euro?
In his foreign exchange analysis from 20 December, ING Group’s Francesco Pesole believed the EUR/USD pair could stabilise at 1.06 going into 2023:
“We think EUR/USD may find some stabilisation around 1.0600 into year-end as volatility starts to drop. A drop to sub-1.0500 levels is, however, possible should market sentiment deteriorate, especially on the energy side.
“There are no major data releases to highlight in the next two weeks for the euro, at least until the German CPI figures for December are released (3 January). No European Central Bank speakers are scheduled.”
In an even broader overview of FX markets in 2023, ING’s Pesole, Chris Turner and Frantisek Taborsky said that EUR/USD would set the tone for European currencies in the coming year, potentially ending the year at the parity mark:
“FX markets in 2023 will see fewer trends and more volatility. We say this because conditions do not look to be in place for a clean dollar trend – no ‘risk-on’ dollar decline nor ‘risk-off’ dollar rally. And central banks tightening liquidity conditions through higher policy rates and shrinking balance sheets will only exacerbate the liquidity problems already present in financial markets. Volatility will stay high.
“Softening global activity and trade volume growth at less than 2% will likely limit the gains of pro-cyclical currencies in 2023. EUR/USD could be ending the year near 1.00. If the positive correlation between bonds and equity markets does break down next year, it will likely come through a bond market rally. Our forecast for US 10-year Treasury yields at 2.75% year-end will argue for USD/JPY to be trading at 130 or lower.
“EUR/USD will set the tone for European currencies in general.”
ING recently adjusted its EUR/USD forecasts, projecting the pair to trade at:
$0.98 by March 2023 $1.00 in Q2, Q3 and Q4 2024 $1.02 by March 2024.
In his Daily FX Update from 23 December, Shaun Osborne, chief foreign exchange strategist at Scotiabank, commented:
“No major data reports and no comments from ECB policy makers are leaving the EUR with little to do but drift along in line with the broader USD tone. We think near-term risks are still pointed to the downside for the EUR – the Q4 rally achieved our near-term goal, gains look a little stretched and seasonal trends are USD-supportive moving into the new year. But EUR prospects remain positive from a longer-term point of view, we feel, and modest corrective losses early in 2023 should give buyers an opportunity to reset or add to longs.”
Technically, Osborne was neutral on the pair, saying: “Since peaking above 1.07 mid-month, spot has remained within a 1.0570/1.0670 range – where it sits quite comfortably today. However, Dec 15th’s peak and reversal signify a short-term top is in place at least and could drive some corrective losses for the EUR towards 1.03/1.04 in the next few weeks potentially. While the 1.0735 peak holds, minor EUR gains are a sell.”
The latest EUR/USD forecast from analysts at Citibank Hong Kong was fairly optimistic, highlighting the potential benefit to the euro from China’s reopening. The EUR forecast from 19 December read:
“Although economists say recession is inevitable, it may be milder and shorter than previously envisaged. Milder weather, lower gas prices and fiscal support have lifted sentiment. Debt and equity capital flows from the US can find its way to Europe in 2023. China reopening is the big kicker and the Euro can be a big beneficiary. Downside risks for the Euro are periphery widening via ECB QT, a cold weather snap, and a souring of risk sentiment.”
Citibank’s six- to 12-month EUR/USD forecast was $1.15, falling to $1.10 over the long term.
In a recent overview of the euro’s 2023 outlook, Capital.com analyst Piero Cingari opined that the EUR/USD pair could hold above 1.05 throughout Q1 2023, potentially shedding value as the year goes on:
“Regarding the euro outlook in 2023, investors remain mostly focused on the ECB’s capacity to raise interest rates in the midst of a recession and continuous inflationary pressures tied to Europe’s prolonged energy crisis.
“However, as the market readjusts its expectations in response to a more hawkish than expected ECB in the last meeting of the year, the single currency might find support in the first quarter of 2023. EUR/USD may hold above 1.05, while the single currency may gain ground against low-yielding currencies, such as the Japanese yen (EUR/JPY), or against those whose central bank will be more dovish than anticipated, such as the British pound (EUR/GBP).
“From Q2 2023 onwards, there may be mounting threats to Europe’s growth outlook as well as negative seasonality effects. At the end of winter, European countries will hurry to refill their depleted gas stocks, which may hurt the euro’s terms of trade.
“The euro’s best-case scenario includes averting a recession, higher-than-expected gas reserves amid a mild winter, and a boost in external demand as China reopens. In the worst-case scenario, a harsh winter threatens the resilience of gas reserves, and the increased likelihood of a recession calls into doubt the ECB’s hawkishness.”
Analyst and algorithm-based forecasts.
In her latest video on the currency pair, Capital.com analyst Daniela Hathorn outlined the following support and resistance levels to watch in upcoming weeks:
Resistance.
1.0743 (61.8% Fibonacci) 1.0590 (June 27 High) 1.0513 (50% Fibonacci)
Support.
1.0282 (38.2% Fibonacci) 1.0165 (November 11th Low) 1.0000 (Parity)
Algorithm-based website Wallet Investor ’s EUR/USD forecast predicted the pair falling in the next 12 months – as of 28 December 2022, the service’s EUR/USD forecast for 2023 expected the pair to fall to trade at an average of $1.041 by the end of the year.
In a longer-term projection, Wallet Investor ’s EUR/USD forecast for 2025 had the pair potentially trading at below parity level, averaging $0.999 by December that year.
The EUR/USD forecast for 2023 from AI Pickup was bearish – the website saw the pair averaging a rate of $1.1. The following years, however, could see a rise to an average of $1.24 in 2024 and $1.26 in 2025. The platform’s EUR/USD forecast for 2030 saw the pair trading at $1.36, before edging up to $1.39 in 2032.
Remember that analysts and online forecasting sites can and do get their predictions wrong. It is always best to carry out your own research and weigh the latest market trends and news, technical and fundamental analysis, and expert opinion before making any investment decisions. Never invest money you cannot afford to lose.
FAQs.
Why is EUR/USD rising?
The EUR/USD pair has been rising in recent weeks as the euro continues to benefit from improved sentiment in the eurozone and expectations of a slowing US Federal Reserve rate hike cycle.
Will EUR/USD go up or down?
The direction of the euro could depend on whether the gap between economic growth and interest rates in the US and Europe continues to widen.
When is the best time to trade EUR/USD?
The best time to trade a currency pair is when the local markets for the two currencies overlap. For the euro against the dollar, this would be between 13:00 and 16:00 GMT (UTC). This is also usually when US economic data is released.
Is EUR/USD a buy or sell?
Whether EUR/USD is a good investment for you or not will depend on your portfolio composition, investment goals and risk profile, among other factors.
Different trading strategies will suit different investment goals with a short or long-term focus. Remember, currency pairs can be highly volatile. You should do your own research and never invest money you cannot afford to lose.