Recovery May Continue but Upside Will Be Limited

EUR/USD FORECAST:

• The euro continued to strengthen towards the U.S. greenback in the course of the first three months of the yr
• Heading into the second quarter, EUR/USD is prone to stay in an upward trajectory
• Obtain our full quarterly euro forecast for a extra complete view of the widespread foreign money’s outlook

Most Learn: GBP/USD Challenges Main Confluence Resistance, Bearish Reversal in Play

The euro gained floor towards the usdollar in the course of the first three months of 2023, extending its rebound that started in October of final yr, although its advance didn’t comply with a straight line and encountered a number of obstacles. This was an indication of solely reasonable bullish conviction within the widespread foreign money.

There have been a number of optimistic drivers for the euro to listing, however considered one of them was the sharp pullback in pure gasoline costs. Chart 1 reveals how the EUR/USD’s restoration has coincided with the downward correction in pure gasoline costs.

After reaching report highs above €300/MWh in August 2022, European pure gasoline costs tumbled again to earth, sinking greater than 85% from these stratospheric ranges. This prevented an power disaster from unfolding following Russia’s weaponization of fossil gasoline exports. On this context, the area’s economic system managed to stabilize and even shock on the upside.

By means of context, euro zone’s financial exercise was projected to develop at a paltry 0.2% this yr, however consensus estimates now level to a GDP growth of round 0.8%, with the reopening of the Chinese language economic system additionally contributing to an improved outlook.

Chart 1: EUR/USD versus European Pure Gasoline Futures Costs (TTF)

Supply: TradingView, ready by Diego Colman

ECB Wavers on Steering Amid Banking Sector Turmoil

Financial resilience, in flip, has given the European Central Financial institution the chance to press forward with its mountaineering cycle within the battle to curb inflation, which stood at 8.5% y-o-y in February. Whereas the majority of the tightening could also be over, policymakers are nonetheless prone to ship between two and three further hikes over the approaching months. Maybe even 4.

It’s true that the ECB avoided giving steering at its final assembly, however this was because of the US/ European banking sector upheaval. Market turmoil has since eased after U.S. authorities moved swiftly to shore up the monetary system and Swiss regulators helped brokered a deal to rescue Credit score Suisse earlier than an imminent failure.

Financial Coverage Divergence to Profit the Euro

Provided that the European Central Financial institution is anticipated to lift charges just a few extra occasions by means of the summer time whereas the FOMC stays on maintain, there’s scope for the euro to strengthen additional towards the U.S. greenback. Nevertheless, financial coverage divergence will solely provide modest help; after all of the ECB’s terminal charge is seen reaching 4.0% at most versus 5.10% for the Fed.

In any case, euro’s bullish state of affairs might be strengthened if sentiment improves materially, however that could be a tall bar to climb in a synchronized international slowdown and with the warfare in Ukraine raging on unabated.

To summarize, EUR/USD has the potential to maintain rising in the course of the second quarter, however its upside will likely be restricted contemplating the present macro and monetary backdrop.

As well as, the appreciatory development might be interrupted every so often if new episodes of threat aversion flare up, as these will bolster demand for haven belongings. Basically, when market turbulence erupts and volatility spikes, high-beta currencies such because the euro are likely to carry out poorly towards the buck.

This text focuses on the elemental outlook for the euro, however if you want to be taught extra about technical forecast and worth motion evaluation, obtain DailyFX’s complete quarterly information by clicking the hyperlink beneath. It is free!