Is EURUSD Bottomed?
The euro has been a topic of great interest in the past year, as the euro declined sharply throughout 2022 which was mainly driven by the significant increase in the US Fed Fund Rate by the Federal Reserve to combat inflation, leading the US Dollar to rise sharply across the board, reaching the highest level since May of 2002 at 115.0, while the euro declined all the way to 0.9530’s which is the lowest level since June of 2002.
The case of the ECB ahead
The entire world has suffered from soaring inflation in 2022, leading most of the major banks to stop their quantitative easing and switch to quantitative tightening. This includes selling assets and raising rates.
The ECB was forced to end the zero-era interest rate and hiked it multiple times in 2022 to 2.5%, which is the highest interest rate for the Euro Area since November 2008. At the same time, the ECB is preparing the market for further hikes ahead. In recent remarks by many of the ECB members, they all mentioned that a larger increase might be needed before the end of the first half of this year.
The ECB vs. the Fed
After the federal reserve increased the Fed Fund Rate to 4.5%, the Fed decided to slow down its tightening policy as inflation is starting to cool off for a few months. On the other hand, inflation in Europe is still near a record high, which keeps the ECB on track for further hikes ahead, while the Fed is unlikely to move much from here.
This diversion between the ECB and the Fed would be more favorable to the euro than the US Dollar, as the ECB will not discuss any rate cuts any time soon, while the Fed may need to think about cutting the rates if inflation started to drift lower faster than expected. Therefore, the next few months are crucial as both banks’ decisions will be data-dependent.
Why the euro is popular?
The euro is a popular currency among traders because of its relative stability. Unlike some other currencies, the euro has been relatively stable over the years and is seen as a safe haven for traders who are looking for predictable returns on their investments. The Eurozone also provides access to a large market of goods and services due to its wide reach across Europe.
The euro is also attractive to traders because it has low transaction costs compared to other major currencies such as the US dollar or Japanese yen. This makes trading in euros much more cost-efficient than trading in other currencies, making it a desirable option for many investors.
Finally, the euro has benefited from its close relationship with some of the world’s most powerful economies such as Germany and France. This has helped to create an environment where investors can feel secure when investing in euros, providing them with greater peace of mind when dealing with this currency.
All these factors have combined to make the euro one of the most popular currencies among currency traders.
Did the euro find its bottom?
Now the one million dollar question, did the euro find its bottom against the dollar? In short, most likely yes. The euro recovered more than 50% of its decline during the last quarter of last year, rising from 0.95 to as high as 1.09 in early January, holding multiple key levels and trendlines on the daily and the weekly chart as well.
Despite the fact that technical indicators are now overbought, the general outlook remains bullish for this year. A pullback is highly possible, but it is likely to remain limited above the 1.0 parity level. Therefore, if you are looking for a medium to long-term investment in the euro, it would be wise to wait for a pullback towards 1.05 as a start before looking into initiating a new long position.
Risks in 2023
The euro is facing a number of risks in 2023, including the potential for fragmentation, where weaker states’ borrowing costs rise more than wealthier peers. This could be caused by a decrease in the euro’s value below parity against the dollar and other currencies. Additionally, there are risks associated with the digitalization of the euro, such as unintended relevant distortions in the financial system performance and impacts on financial intermediation. Finally, sanctions on Russian oil imports could also have an effect on the euro.
For how long EURUSD will remain the most popular pair?
It is difficult to predict how long the euro will remain the most popular currency pair. Factors such as geopolitical events, economic growth, and investor sentiment could all influence the euro’s long-term popularity. However, despite potential risks, investors still find that trading in euros offers many benefits in terms of stability and cost-efficiency. As a result, the euro is likely to remain an attractive option for traders for some time to come.
