The EurUsd Currency Pair - A 2022 Performance Recap and 2023 Forecast
2022: The Two-Faced Year for EurUsd
2022 was a year of contrasting fortunes for EurUsd. The first half of the year was notably negative, while the second half saw an overwhelming recovery. From the start of the year until the end of September, the exchange rate dropped from 1.13 to 0.95. The semi-annual balance fell below -10% for EurUsd. Then after months of consolidation below parity, an overwhelming reaction occurred. The year ended with a 7% decline in the exchange rate compared to the previous 12 months.
The reasons for EurUsd's poor performance in the first half of the year were rooted in the beginning of the war between Russia and Ukraine, and the subsequent impacts on energy supplies for Europe, which was heavily dependent on Russia. Speculation on the price of gas caused many investors to flee, fearing a deep economic recession in Europe. This is reflected in the poor performance of the European stock market during this period. At the same time, the Federal Reserve started to implement a more aggressive monetary policy with interest rate hikes that were fast and decisive to combat rising inflation. The European Central Bank, in contrast, was slower to respond, showing some interest rate pretensions, but a differential between Treasuries and Bunds reached high levels, making American government bonds more attractive than their European counterparts, favoring the dollar.
However, things began to change in the autumn. On the military front, Europe united in sanctions, and even implemented price caps on Russian oil and gas. On the monetary policy front, the ECB unexpectedly adopted a more hawkish stance, rapidly raising the cost of money. This was in contrast to the US, where signs of economic slowdown and inflation (last December data at 6.5%) suggested that the peak of interest rates was near. This led the market to anticipate a narrowing of the interest rate differential and growth, resulting in an increase in the demand for euros.
2023 Outlook for EurUsd
The beginning of the year has been very positive for the EurUsd exchange rate. As the market anticipates the ECB and Fed meetings, it has positioned itself short on the greenback, betting on a more accommodating monetary policy by the Fed in the second half of the year. Despite the repeated and clear denials by Powell, the Fed will soon have to decide how to react to a rapidly deteriorating economy (as evidenced by the ISM indexes), a decelerating inflation and a labor market that is currently still strong, but at risk, as well as a housing market that has been hard hit by interest rate increases.
On the Eurozone side, the ECB seems to want to continue to keep a high guard on interest rates, also because inflation is slow to return due to the obvious reasons of asynchrony with the United States where interest rate increases began earlier. The dismantling of the QE plan is part of Lagarde's strategy to reduce liquidity in the market to make the convergence of inflation towards 2% more rapid. The renewed interest of the market in Europe is confirmed by the stock market, where relative strength compared to the American market has been very positive. This means that the next few months should see a stronger-than-expected economic recovery in Europe.
Technical signals favorable to the euro
The cut of the 200-day moving average by the 50-day moving average summarizes 2022 and perhaps the 2023 outlook for EurUsd. In 2021, the so-called "death cross," or the crossing of the long-term moving average from above to below, signaled the start of a bearish market. In late 2022, however, the "golden cross" marked the beginning of a bullish phase for EurUsd. This event is also accompanied by a sudden rise in the one-year Rate of Change (ROC) oscillator, nearing the 10% threshold. A level that in 2017 and 2020 anticipated, but not intercepted, the maximums. This signal confirms that the initial part of 2023 for EurUsd will still be characterized by an upward trend pushing the oscillators into even more extreme territory, raising the possibility of a primary top forming. Thus, the forecast is for a positive first part of the year for the euro, followed by a stop and distribution phase in the second part of 2023.
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