FX.co ★ Euro's success scares the US dollar

The balance in the EUR/USD pair is periodically disturbed amid the noticeable growth of both the US dollar and the euro. It's currently the latter's turn. The euro actively seizes the chance, disturbing the US dollar with a steady increase.

Today, the price of the Euro currency rose amid the temporary geopolitical lull. The confrontation between the West over the situation around Ukraine continues to put pressure on the EUR/USD pair. The euro maintained its gains, rising on moderately positive news, but failed to make further progress in growth. On Wednesday morning, the EUR/USD pair was trading at the level of 1.1357, approaching the round level of 1.1400, near which specialists said that the pair will end the current week.

Many analysts, including the investment bank JP Morgan's currency strategists, do not rule out the growth of the euro to the level of 1.1500. Against the backdrop of the ECB's monetary strategy update, JP Morgan bank revised its previous forecasts for the euro. It can be recalled that the regulator allowed an increase in the interest rate by the end of this year, although it had previously refused this measure.

JP Morgan emphasizes that the turn in the ECB's rhetoric contributes to the improvement of the euro forecast, but it is modest, not cardinal. At the same time, they said that the difference in interest rates remains in favor of the US dollar, since the Fed has planned four to five rate hikes, and the ECB is delaying a similar step.

An increase in the aggregate GDP of 19 eurozone countries (by 4.6% year on year and by 0.3% quarterly) gave invaluable support for the euro. According to the Eurostat agency, the positive macro data coincided with the experts' forecasts and with the preliminary estimate.

In turn, the US currency moved slightly into the shadows amid the euro's appreciation. The interest for it brought back the January rise in US producer prices. This indicator rose by 1% in the first month of 2022, doubling analysts' forecasts. This news strengthened the "bullish" sentiment on the US dollar, supporting investors' interest in it.

The US market is under pressure from the tightening of the Fed's monetary policy. Most market participants are expecting a 50 bps rate hike by mid-March 2022. This is a higher rate of recovery than other central banks. Currency strategists are evaluating the prospects for a sharp increase in the Fed's interest rate amid a rapidly unwinding inflationary spiral.

Economists warn that the decision of the American regulator could seriously affect the actions of the European one. In early February, the ECB announced a possible revision of the rate hike by the end of the year amid the soaring inflation. The probability of a rate hike by the ECB has increased significantly. Due to the reassessment of future expectations, the euro exchange rate has increased significantly. Now the market is counting on five Fed rate hikes by the end of this year and on the ECB's determination in this matter. Experts are sure that the implementation of such a scenario will support the euro.

In view of this, the economists of the investment bank ABN AMRO revised their previous calculations for the euro. They note that the ECB's current actions force us to abandon excessively pessimistic forecasts for the euro. ABN AMRO estimates that there will be four rate hikes by the Fed (by 25 basis points) and a single hike by the ECB (by 10 basis points) this year.

The bank's calculations slightly differ from market expectations, but ABN AMRO insists on the proposed scenario.

"If our point of view is correct, then the euro will weaken against the dollar this year and next," ABNA AMRO emphasizes.

The bank's updated forecast for the EUR/USD pair is 1.0700 by the end of 2022 and 1.0500 by the end of 2023. Earlier, experts expected that the EUR/USD pair would approach parity by the end of next year.