Euro Forecast | Will Euro Go Up or Down? (2024)

Euro Forecast | Will Euro Go Up or Down? (1)

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The euro (EUR) has tumbled close to 6% against the US dollar (USD) year-to-date (YTD) as the economic outlook in Europehas deteriorated on the back of the energy crisis triggered by Russia’s invasion of Ukraine.

However, theeuro has regained strength in recent weeks as the European Central Bank (ECB) appears to be taking decisive action in reining rampant inflation in the eurozone.

As of 20December, theEUR/USD currency pair was trading at $1.063. Growth of almost 5% over the past month put the currency pair atlevels not seen since early June 2022.

EUR/USDhas benefitedfrom a general dollar weakness as inflationary pressures in the US continue to ease, while the ECB lifted interest rates by50 basis points last weekas expected, reiterating thatmore hikes will follow, and outlined plans for quantitative tightening.

The freshPurchasing Managers’Index(PMI) data for December showed private sector activity in the euro area shrank at the slowest pace in four months, which could suggest the impending recession in the EUcould be less severe than previously anticipated.

EUR/USD live exchange rate chart

With recession fears rising, will the ECB’s hiking cycle be cut short,pulling the pair lower, or is a rebound likely?

Read on for the latest euro news as of 20December 2022, as well as analysts’ euro predictions for 2022 and beyond.

How has the euro traded so far in 2022?

EUR/USD has been steadily trading lower across the year. Itkicked off 2022 at $1.1370, then rose to $1.1495 in early February, before falling to a low of $1.0350 on 13 May –levels last seen in January 2017.

From here, the pairattempted to rebound, rising to $1.0650 at the beginning of June, before falling again and breaking euro parity with the US dollaron 13 July 2022, marking a 20-year low.

The pair rebounded to $1.036 by 11 August, but the growth would be short-lived.The currency pair slid down sharplyin the space of a week, breaking parity once more on 22 August 2022.

EUR/USD then fell below the 99-cent mark, hittinga 20-year low of$0.9881 on 5 September, as Russia indefinitely haltedsupplies of gas via its main pipelineto Europe.

The currency pairthen embarked on a five-day rally spurred by the ECB’s 75-basis-point (bp)hike, peaking at $1.01977 on 12 September before sliding below parity once again,reaching a YTD low of $0.9596 on 27 September.

Asof 20 December 2022, EUR/USD was trading above parity once again at $1.063, having sustained growth of5% over a period of three months.

What has been driving the euro?

Slowing growth and inflation

The euro has been steadily falling in recent months amid growing concerns over the health of the eurozone economy, as inflation rose to a record high and growth slowed. Recent macro data show thatthe eurozone economy is not doing so well.

Weakness in the eurozone economy is primarily driven by rampant inflation, and rising energy and borrowing costs. Inflation was already high at the start of the year, owing to Covid-19 supply chain disruptions and mismatched supply and demandas nations came outof lockdowns.

Since then, as a result of the Russian invasion of Ukraine in February and Western sanctions on Moscow, food, fuel and energy prices have surged.

Euro area inflation, as measured by consumer prices, was expected to fallto10% year-over-year (YOY) in November– down from 10.6% in October 2022. Energy prices have been a major contributor to the rise in inflation –energy is expected to have the highest annual rate in November (34.9%compared with 41.5% in October), followed by food, alcohol and tobacco (13.6%, compared with 13.1% in October).

The latest gross domestic product (GDP) figures for the eurozone, as cited by Reuters, showedquarterly economic growth being revised slightly higher to 0.3%in Q3 2022 from preliminary estimates of 0.2%, and following a 0.8% expansion in the previous three-month period.

However, the more timely Purchasing Managers’Index (PMI) reflectedthe slowdown in business activity in recent months. The December composite PMI increased for a second month in a row to 48.8from 47.8 in November. The 50 mark separates expansion from contraction.

Commenting on the Eurozone Composite PMI data, Chris Williamson, chief business economist at S&P Global Market Intelligence, said:

“While the further fall in business activity in December signals a strong possibility of recession, the survey also hints that any downturn will be milder than thought likely a few months ago. The data for the fourth quarter are consistent with GDP contracting at a quarterly rate of just less than 0.2%, and forward-looking indicators are currently boding well for the rate of decline to ease further in the first quarter.

“The manufacturing downturn has moderated especially markedly in December, led by Germany and linked to a combination of improving supply conditions and reduced fears of energy constraints. The service sector malaise has also calmed, in part driven by signs of reduced fears over the cost of living squeeze and, in the financial service sector, reduced concerns over the tightening of financial conditions.

“The outlook for inflation is especially encouraging, with supply chains now improving for the first time since the pandemic began and firms’ costs growing at a sharply reduced rate, feeding through to lower rates of increasefor prices charged for both goods and services."

“The downside is that this improving inflation outlook is primarily a symptom of falling demand, which has removed pricing power from many companies and their suppliers, and the business environment remains one in which confidence remains very subdued by historicalstandards. Thus, while the downturn is looking likely to be less steep this winter than previously anticipated by many, there remain few signs of any meaningful return to growth evident as 2022 comes to an end.”

On 11 November, the European Commissionconfirmed it predictedgrowth of 3.2% for the 19-country currency bloc this year – above the 2.6% it forecast in July. Growth for next year, however,is now forecast to be 0.3%instead of the 2.3% previously estimated.

For theEU as a whole, including those countries not in the euro, the growth forecast was raised to3.3% in 2022 (up from 2.7% in June)butrevised down to0.3% in 2023.

The eurozone economy is expected to take a downturn at the end of the year and into 2023, with many economists expecting a recession as high inflation squeezes consumers’real incomes and company margins.

Economists expect the region’s economy to contract by 0.4% in thefourth quarter of 2022, and by 0.3% in thefirst quarter of 2023, according to a consensus forecast from FactSet and quoted by Dow Jones’Xavier Fontdegloria.

European Central Bank rate rises

At the June ECB meeting, policymakers pre-committed to a rate hike –the first in over a decade – as central bankpresident Christine Lagarde, as well as the institution’spolicymakers,looked to fight inflation.

On 21 July, the ECBraisedall three key interest rates by 50bpsfor the first time since 2011, exceeding market expectations and breaking its own guidance for a 25bps move.

The three key rates were then further raised by 75bps on 8 September and 27 October. The ECB raised the three rates by 50bps during its last monetary policy meeting of 2022 on 15 December, marking a fourth rate increase.

The rise took the deposit facility to 2%, the refinancing rate to 2.5% and the marginal lending to 2.75%, a level not seen in 14 years.

According to apress release by the ECB, the bank will continue to take aggressive measures to fight inflation, which could indicate potential support for the euro:

“The Governing Council today decided to raise the three key ECB interest rates by 50 basis points and, based on the substantial upward revision to the inflation outlook, expects to raise them further. In particular, the Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictiveto ensure a timely return of inflation to the 2% medium-term target. Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations."

“The euro area economy may contract in the current quarter and the next quarter, owing to the energy crisis, high uncertainty, weakening global economic activity and tighter financing conditions. According to the latest Eurosystem staff projections, a recession would be relatively short-lived and shallow. Growth is nonetheless expected to be subdued next year and has been revised down significantly compared with the previous projections.

“Beyond the near term, growth is projected to recover as the current headwinds fade. Overall, the Eurosystem staff projections now see the economy growing by 3.4% in 2022, 0.5% in 2023, 1.9% in 2024 and 1.8% in 2025."

Energy crisis

The euro dipped below the 99-cent mark on5 SeptemberasRussia exacerbated the continent’s energy crisis by shutting off its main gas artery to Europe,the Nord Stream 1 pipeline, thus setting the stage for acold winter ahead for businesses and households in the region.

The gas stoppage“is another blow to the European economic outlook, which has left the euro weak in the near term due to governance-related risks”, Piet Haines Christiansen, chief strategist at Danske Bank in Copenhagen, told Bloomberg on 4 September.

“At the same time, yet another stimuli package from Germany is an attempt to keep growth afloat, which makes inflation forecasting and the job for the ECB more tricky.”

In a sign of the severity of the problem, Germanyunveileda relief planworth about €65bn on 4 September.

Finland has alsosaidit will stabilise the power market with a €10bn ($9.95bn)programme. The day before,Swedenannounced $23bn in liquidity guaranteesfor its utility and energy companies, as it sought to fend off a broader financial crisis.

“This has had the ingredients for a kind of a Lehman Brothers of theenergy industry,” Finnish economic affairs minister Mika Lintila said on 4 September.

“The government’s programme is a last-resort financing option for companies that would otherwise be threatened with insolvency,” Finland’s prime minister Sanna Marin told a news conference.

Euro forecast: Price prediction for 2023and beyond

Given rising inflation, slowing growth expectationsand the fact that the ECB is only just starting to hike rates, where do analysts see the euro going over the coming months and years?

In his foreign exchange overviewfrom 20December, ING Group’s Francesco Pesolebelieved the EUR/USD pair could potentially test 1.07 before Christmas:

“EUR/USD has been on the sidelines of the post-BoJ market reaction, holding marginally above 1.0600. It’s likely that the downward pressure on the dollar from the BoJ’s hawkish shift hasbeen fully offset by the deterioration in risk sentiment, which negatively impacts the pro-cyclical euro.

“There are lingering downside risks to the dollar and we could see EUR/USD test 1.0700 before Christmas. Anyway, volatility should become significantly thinner from Wednesday/Thursday, with today’s BoJ announcement having been the last major event in markets.

“The eurozone calendar includes consumer confidence data – which is expected to have slightly improved in December – and speeches by ECB’s Peter Kazimir and Madis Muller.”

In a more broad overview of FX markets in 2023, ING’s Turner, Francesco Pesole and Frantisek Taborskysaid thatEUR/USD would set the tone for European currencies in the coming year, potentially ending the year at the parity mark:

“FX markets in 2023 will see fewer trends and more volatility. We say this because conditions do not look to be in place for a clean dollar trend – no ‘risk-on’ dollar decline nor ‘risk-off’ dollar rally. And central banks tightening liquidity conditions through higher policy rates and shrinkingbalance sheets will only exacerbate the liquidity problems already present in financial markets. Volatility will stay high.

“Softening global activity and trade volume growth at less than 2% will likely limit the gains of pro-cyclical currencies in 2023. EUR/USD could be ending the year near 1.00. If the positive correlation between bonds and equity markets does break down next year, it will likely come through a bond market rally. Our forecast for US 10-year Treasury yields at 2.75% year-end will argue for USD/JPY to be trading at 130 or lower.

“EUR/USD will set the tone for European currencies in general.”

INGrecently adjusted its EUR/USDforecasts, projecting the pairto trade at:

$0.98throughout Q4 2022
$0.98by July 2023
$1.00by January2024
$1.10 by September 2024.

In his Daily FX Update from 20December, Shaun Osborne, chief foreign exchange strategistat Scotiabank,commented:

“German PPI fell 3.9% in Nov, more than double expectations, after a 4.2% fall in Oct. PPI growth over the year remains extremely high (28.2%) but the drop in prices in recent months is bolstering hopes that upward pressure on consumer prices will ease soon. ECB policy makers will want to see clear evidence of CPI moving back much closer to target before relaxing, however. ECB governor Kazimir commented earlier that tightening should continue at a ‘stable’ pace, implying more 50bps hikes at coming meetings into the spring.”

Technically, Osborne was neutral/bullish on the pair, saying: “We still rather think the EUR’s recent rally is due a pause or correction lower but intraday price action looks modestly constructive and may develop a little more upside pressure in the short run. EUR/USD losses have been well-supported on sub-1.06 dips; intraday gains that extend through 1.0655/60 (minor bull trigger) will add to upside momentum for a retest of the low 1.07s. Intraday support is 1.0575/80.”

In its Precious Forecast for 2023, German firm Heraeus, in collaboration with SFA Oxford,said the following of the EUR/USD outlook:

“The period of dollar strength may be nearing an end. The US dollar strengthened significantly during 2022, but historically the dollar has not sustained such large gains. After the euro strengthened slightly to 1.15 in early 2022, the dollar gained the upper hand, with the euro first falling below parity in July and reaching a low of 0.97 in September.

“Next year, the euro is expected to strengthen and trade between 1.12 and 0.92. Near term, the euro could depreciate a bit more as the Fed is likely to raise rates further. However, considering the historical tendency for the euro to rebound after rapid and significant depreciations against the dollar, the euro is likely to appreciate against the dollar next year.”

As of 20 December, algorithm-based forecaster Wallet Investor predicted the pair could tradeat an average rate of $1.049 by the end of January 2023. The platform’s euro forecast for 2023 saw the pair experiencing a potential decline andtrading at an average of $1.037 by the end of December.

In the longer term, its euro forecast for 2025 saw the rate falling below parity, to come in at an average of $0.996 by the end of the year.

AI Pickup’s euro forecast for 2023 saw the EUR/USD pair averaging around $1.06, before rising to $1.21 in 2024, $1.26 in 2025, and $1.30 in 2026. The platform’s euro forecast for 2030 suggested a EUR/USD rate of $1.35, expecting the pair to continue rising in the years following 2028. It forecast the rate could average $1.35 in 2031 before edging up to $1.36 in 2032.

When looking at EUR forecasts, remember that analysts can and do get their predictions wrong. Always do your own research and consider the latest market trends and news, technical and fundamental analysis, and expert opinion before making any investment decisions. Never invest money you cannot afford to lose.

FAQs

Why has the euro been rising?

The euro has been rising on the back of aggressive actionby the European Central Bank (ECB), moderately positive economic news in the eurozone, and a potential slowing of the US Federal Reserve’s interest rate hiking cycle, which could reduce the dollar’s attractiveness as a safe-haven asset.

Will EUR go up or down?

The outlook for the euro is tied to the health of the region’s economy. While the near-term outlook is deteriorating, once stagflation has passed, the euro could rise.

When is the best time to trade EUR?

You can trade the euro 24 hours a day. However, the besttimes to trade are around 08:00 to 10:00 local time, when economic data tends to be released. The12:00 to 16:00 window is when the US and European markets are open and liquidity is high.

Is EUR a buy, sell or hold?

Whether the euro is a buy, sell or hold depends on the economic outlook for the euro area and whether the European Central Bank (ECB) is likely to act to tighten or loosen monetary policy.

Different trading strategies will suit different investment goals with short or long-term focus. Remember, currency markets are highly volatile – you should do your own research, and never invest money you cannot afford to lose.