The US dollar has so far been unable to recover lost ground, but market participants are sure that USD will recover soon. The euro has taken advantage of the situation and hit new highs.
Jerome Powell, the chairman of the Federal Reserve, did not make any clear statements on US economic prospects and future interest rate moves. His ambiguous position has halted the upward momentum of the US dollar and sent USD downwards.
Furthermore, some Fed policymakers commented that the regulator would have to hold the interest rate at 5% or higher for some time. The Fed is expected to increase the interest rate by 25 or 50 basis points at its next policy meeting. However, such a move is in doubt. The markets are focusing on the US annual inflation report, which is due on Thursday, January 12. According to analysts, US CPI slowed to 6.5% y/y in December from 7.1% the previous month, although it is still above the 2% target.
As a result, EUR/USD hit the highest level since June 2022 as the euro rose steadily. Analysts attributed the euro upsurge to a recovery of the energy market in the eurozone and a weak US dollar. The pair traded near 1.0754 early on Wednesday, January 11, trying to surpass it.
This situation has favored the European currency. Furthermore, the Goldman Sachs has revised its outlook for the eurozone upwards. They predict that the EU economy can, in fact, avoid recession in 2023, rising by 0.6%. Earlier, the eurozone's economy was expected to shrink by 0.1% this year.
Analysts at the Goldman Sachs have noted such positive factors as a slight economic upturn in the EU in late 2022, a noticeable decline in gas prices and China's swift lifting of quarantine restriction. The bank also adjusted its inflation outlook: it is expected to decline to 3.25% by the end of 2023.
Many analysts believe that EUR was not only pushed upwards by lower natural gas prices, but also by the reduced probability of recession and the energy crisis in the eurozone. Experts say that despite the bearish trend, EUR/USD may continue to rise in the short and medium term. Analysts note that currently the tandem is moving towards the levels of 1.0775-1.0785, with 1.0900 being its next target.
According to analysts, the pair may grow strongly if the Fed eases its monetary policy. Market participants expect the regulator to clarify its position soon. Meanwhile, the ECB is likely to tighten its monetary policy in the next few months. The reasons are rising inflation, hawkish sentiment and fears of recession in the region.
The ECB needs to raise its key interest rate to 3.25%, experts say. This can be achieved by increasing it twice by 0.5 percentage points in February and March 2023. At the same time, analysts do not rule out an additional rate 0.25 p.p. hike in May. Earlier, in December 2022, the regulator announced that it was ready to increase the rate twice by 50 basis points, which took the market by surprise. At the moment the ECB interest rate stands at 2%.