(BFM Bourse) – The euro rose back above $1.11 on Wednesday. Since October, the single currency of the euro zone has gained almost 7% against the greenback.
After a year in 2022 where the euro suffered against the dollar – the euro zone currency had lost 6% against the greenback – many analysts were counting on a rebound of the currency of the monetary union against the king dollar .
This should eventually happen. On Wednesday, the euro once again crossed the threshold of 1.11 dollars which it had not reached since last July. The currency fell a little this Thursday afternoon by 0.1% to 1.1092 dollars. Its increase over the whole of 2023 currently stands at 3.7%. Which would constitute the first year in the green of the euro against the dollar since 2020, according to Bloomberg.
Above all, since a low reached in October, the euro has regained around 7% against the greenback. A significant increase in the foreign exchange market, where variations are often contained (one currency “falls” against another when it loses more than 1% over a day), due to the immense volume experienced by this market, with exchanges that can exceed 6.500 billion dollars per day.
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Expectations of more aggressive rate cuts for the Fed
This movement can be explained by a bundle of elements. Overall, the economic situation in the United States is doing better than that of the euro zone, where Germany, the region’s leading economy, is expected to experience a contraction in its gross domestic product (GDP) of 0.5% this year, according to IMF projections, against an expected increase of 2.1% for the United States.
Above all, with the decline in inflation on both sides of the Atlantic, investors began to anticipate significant key rate cuts from the two central banks, the European Central Bank (ECB) and the American Federal Reserve. (Fed).
These expectations nevertheless turn out to be more aggressive for the Fed. According to data from the CME Group’s Fedwatch tool, investors are counting on a rate cut from the US central bank of between 150 and 175 basis points, or between 1.5 points and 1.75 percentage points, here in December 2024. As an example for the ECB, Barclays is retaining a reduction in its key rates of 125 basis points but between now and January 2025, with a rate of refinancing operations which would go from 4.5% to 2.25%. Goldman Sachs is counting on exactly the same magnitude of rate cuts with a rate of 2.25% “at the beginning of 2025”.
The safe-haven status of the dollar
These speculations were reinforced by the slight divergence of tone that was observed between Jerome Powell and Christine Lagarde, the presidents of the Fed and the ECB, during the last monetary policy meetings of the two major central banks.
Jerome Powell seemed to slightly open the door to rate cuts by acknowledging that members of the Fed had discussed this option, where Christine Lagarde assured that rate cuts had not been mentioned by the participants in the meeting of the ECB Monetary Policy Committee.
The central banker also sent a message of firmness, judging that the members of the monetary institution should not let down their guard in their fight against inflation. “The restrictive tone of the ECB supports the euro against the dollar,” agreed Bank of America in mid-December.
The latest “kiss cool” effect is that the market has regained its appetite for risk in recent months, supported by these expectations of a reduction in key rates. However, the dollar is considered a safe haven, due to its status as a major currency in international trade.
In a feverish market, this supports the greenback. But when investors regain confidence, this safe-haven status turns against the dollar, to the benefit of other currencies deemed more risky, such as the euro but also the currencies of emerging countries, all things being equal.
Limited potential for the euro?
So after this good end to the year, is the euro still under pressure against the dollar? Not so much, according to UBS.
The bank sees the euro-dollar pair reaching $1.10 next June and then $1.12 in a year. The Fed’s monetary policy committee “is more reactive than the ECB’s board of governors, due to the intrinsic differences in the American labor market which make this market more dynamic than that of the euro zone”, analyzes the Swiss bank .
“The US central bank was also an early mover in the interest rate hike cycle and we expect a similar pattern in terms of easing policy,” the establishment continues. Consequently, UBS considers that the Fed will raise its rates from spring 2024, whereas the ECB would wait until June. Which certainly remains likely to support the euro.
“However, the economic context in Europe is not favorable to the euro. In addition, the sluggishness of global growth is weighing on exports from the euro zone,” adds the Swiss bank.
Bank of America judges that economic statistics in the euro zone in the first quarter could weigh on the euro zone currency. The American bank expects the euro to be at 1.07 dollars in the first quarter, then 1.10 in the second, and 1.15 in the third and fourth.
“The euro seems overbought and, with the German economy on the brink of collapse, it seems that the risk of a regional recession is much higher in this country than in the United States,” says Helen Given of Monex USA, cited by Bloomberg.
Julien Marion – ©2023 BFM Bourse