The new week begins with positive news for the euro, which managed to outperform the US currency and is trying to consolidate its results. However, the possibility of a dollar Christmas rally is still questionable, so it's too early to celebrate the euro's victory, analysts believe.
At the end of the previous week, after receiving disappointing macro data on the US PMI, fears about a recession and a slowdown in the global economy intensified in the markets. The actions of the U.S. and European central banks on key rates played a part in this. According to analysts, at the moment, the Federal Reserve is closer to the end of its cycle of rate hikes than the European Central Bank. Against this backdrop, markets expect a pivot in the Fed's monetary policy in 2023, although Fed Chairman Jerome Powell argues otherwise.
According to experts, the Fed is able to significantly raise the rate, but it could undermine the financial market. Therefore, the central bank is wary of any sudden moves. Take note that the Fed expects U.S. GDP growth to 0.5% in 2023.
The U.S. economy is currently outperforming the European economy, so the Fed's first priority was to raise rates. However, at the end of last week, the ECB suddenly showed a hawkish tone. Meanwhile, ECB President Christine Lagarde allowed the rate to rise further (up to 50 bps). Meanwhile, the Fed was a bit hawkish in its statement by announcing a 25 bps rate hike in the coming year.
As a result, after the ECB's hawkish surprise, EUR/USD soared to 1.0700. Nordea Bank economists believe that EUR/USD is likely to reach 1.1000 within the next month. Earlier, at the end of last week, EUR/USD appreciated by 1% after U.S. inflation data and by 0.5% after the ECB rate decision.
However, the situation changed at the beginning of the new week. Earlier, experts were expecting a Christmas rally in USD, but now it is unlikely. Markets are frozen, analyzing the recent macro stats and hoping the situation will stabilize. At the same time, the probability of a dollar rally may provoke its weakening, experts warn. Nordea Bank believes that against this background, the EUR/USD pair will rise above the current level of 1.0600. Later on this forecast was confirmed. On Monday morning, December 19, the EUR/USD pair soared to 1.0633, showing the euro's victory.
At the moment, the euro has caught up with the greenback, though the latter is also looking to rebound. According to analysts, it's not worth counting on the euro to rise for a long time, since the current financial situation is far from being stable. The U.S. currency still has a huge growth potential, which is not afraid of storms in the global market. The USD has lost some of its positions on the world market in the last two months, but it is a temporary setback. According to most analysts, the U.S. currency will be strong again next year.
In 2023, the dollar will be supported by such factors as global recession and inflation, geopolitical tensions, de-globalization and soaring interest rates of central banks. Experts expect the Fed rate to increase to 5.25%. However, if inflation in the U.S. is stable, the central bank will raise the rate even higher. Some experts say it will rise to an impressive 7%-10% per annum.
The USD will get an additional boost from energy and food crises because in case of global uncertainty investors flock to it as a safe haven. At the same time, analysts expect the Fed to tighten financial conditions at the beginning of 2023. In case such a scenario comes true, the greenback will receive significant support, experts said.