Currencies: the euro is having a very good week, heading for $1.20?

(Boursier.com) — The euro consolidated against the dollar this weekend, down 0.45% to $1.08 between banks. Still, the single currency is poised for its best weekly performance against the greenback since November…and many experts believe the rally could continue. Up about 1.6% over five days, the European currency is moving to its highest in nine months. The latest data confirming a slowdown in inflation in the United States dealt another blow to the dollar, as investors reduced their expectations of monetary tightening from the Fed.

Conversely, the euro is carried by a wave of optimism about the economic prospects of the Old Continent due to the drop in gas prices and the reopening of China. Goldman Sachs economists no longer predict a eurozone recession for 2023, potentially paving the way for higher rates. “Pet talks have dominated Forex debates in 2022, but it may only be a matter of time before calls to $1.20 emerge. We won’t challenge them,” says Audrey Childe-Freeman, currency strategist at Bloomberg Intelligence. “That’s an achievable level, and it’s still 14% below its 2014 high near $1.40.”

This trend reversal is all the more remarkable given that the euro was trading below parity barely two months ago. Signs that the Fed may be nearing the end of its hike cycle promise to be a key driver of the euro’s rebound, as European Central Bank officials are still hawkish. Markets are now pricing in a 25 basis point rate hike from the Federal Reserve next month, the lowest in nearly a year. The CME Group’s FedWatch tool now gives a 94.2% probability of a quarter-point rate hike on February 1, after the Fed’s next monetary meeting, compared to 76, 7% on Wednesday, before the release of the inflation figures… The probability of a 50 bp tightening is now only 5.8%.

“The ECB has taken over as the most hawkish central bank,” Kamakshya Trivedi, currency strategist at Goldman Sachs, told Bloomberg TV. A situation to compare to last year, when the Fed took the lead in aggressive rate hikes, which drove the dollar to record highs.

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