Whether you want to trade EUR/USD in the next few days, weeks or months, you will need to keep a close eye on current events in the global economy. In this article,
we'll cover how the currency is likely to move and give you some forecasts based on key factors. These include the FOMC's projection, sync trends within the global
economy, stock price targets and inflation and recession fears.
EUR/USD forecast based on inflation and recession fears
There's no denying the fact that the euro has slid a bit against its global peers in recent weeks. This is due to the usual suspects, namely a lack of trade, a glut of cheap labour and a weakening dollar. In addition to these factors, the European Central Bank is expected to cut interest rates by 50 pct in the coming months. It will be interesting to see what happens to the euro and its currency index over the course of the year.
On a more prosaic level, the EUR/USD has moved from a sterling rate of 1.2800 to a more reasonable 1.1500. The European Central Bank has a clear mandate to reduce inflationary pressures in the eurozone, but the path is not a smooth one. As a result, the ECB has implemented a series of discretionary measures to help tame the eurozone's fiscal cliff. Moreover, the ECB is demonstrating the ability to deliver on the central bank's promise to maintain an independent monetary policy.
The European Union's (EU's) latest economic forecast is a sobering read. The eurozone is forecast to expand by 1.7% in 2019, but only by a fraction of a percent in each of the remaining two years. Meanwhile, the EU's bloated public debt burden will only increase as the fiscal stimulus dries up. This, along with the aforementioned macroeconomic challenges, could hamstring the ECB's efforts to normalize monetary policy. Ultimately, the best way to tackle these challenges is to maintain a healthy balance sheet and avoid the temptation to indulge in irrational fiscal spending.
Although the EU's latest forecast is still a work in progress, it is evident that the region's growth has peaked and is likely to decelerate over the next few quarters. In a nutshell, the EU's fiscal straits are in for a rough ride. That's a problem that can only be addressed by a more resolutely minded central bank. We should expect the ECB to deliver on its promise to do so, but we may have to wait a while before the spruced up eurozone can make itself a permanent fixture in the global economy.
EUR/USD forecast based on sync trends in the global economy
If you're interested in trading the euro against the dollar, you'll want to take a close look at the factors that affect the currency's rate. These include the monetary policies of the European Central Bank (ECB) and the US Federal Reserve. You can also look at central bank officials' comments and opinions as indicators of their policies.
In March, the Fed announced it was hiking rates by 25 basis points. The ECB said it would continue its quantitative tightening, as well as raise interest rates in July and September. Its president, Christine Lagarde, said the eurozone was not heading for a recession and that inflation was still well above the ECB's 2% target.
Since then, the euro has rallied. However, the war in Eastern Europe has taken its toll. And the European economy is more likely to experience a recession than the US. Nevertheless, the euro-dollar's record high of 1.604 is close to breaking.
Despite these positive developments, the Euro continues to face pressure. Last month, it dipped below the 99-cent mark and has traded around 1.055 since then. But the market seems to think the regime has changed.
Some analysts expect the pair to rise in 2023. Wallet Investor, an algorithm-based price-prediction service, predicts it will hover between 1.023 and 1.036. This is a more conservative estimate than some others, though, such as Goldman Sachs Research, which is downgrading its euro outlook to 0.94.
The ECB has a conundrum. It wants to avoid driving the Eurozone into recession, but it has little choice. Moreover, inflation is rising and the ECB needs to act. However, it's important to remember that long-term forecasts aren't always accurate. Traders need to take the latest market trends into account, along with the monetary policy plans of the ECB and the Fed.
For now, the dollar remains the preferred safe haven. With its status as a counter cyclical currency, it has benefitted from the Fed's aggressive monetary policies.
There are other central banks with more space to normalize. A new fund with grants would be a game changer for Europe.
EUR/USD forecast based on FOMC June projection
There are a lot of factors to consider when trying to forecast the EUR/USD exchange rate. The fundamentals of the economy and central bank action are important, but there are also many factors that contribute to the overall currency pair. For instance, the Federal Reserve has more influence on the EUR/USD than the European Central Bank. As a result, forecasts of the euro-dollar pair may need to be revised when the euro gets stronger.
The dollar's status as a counter-cyclical safe haven has helped it to gain in relative value versus the euro. However, a strengthening dollar will only strengthen the euro's weakness.
One key indicator of the euro-dollar's strength is the BTP-Bund spread. This has a very strong inverse correlation to the euro-dollar rate. When the euro-dollar rate rises, the US dollar will depreciate.
Inflation in the eurozone hasn't peaked yet, but its highs have pushed the ECB into a hawkish stance. The ECB announced plans to hike interest rates in July and September, and has a further 25 basis point plan on the books. The Fed's recent decision to hike rates is expected to boost the dollar and weaken the euro. This has the potential to create a virtuous cycle that could push the pair above parity.
However, the euro-dollar will also go through a period of significant decline, with the worst case scenario being a loss of 10%. That's a far cry from the gains that have been seen over the past year.
A good example of the euro-dollar's long-term performance is the fact that it has been trading below parity for the first time in almost two decades. Even though the Euro is down, it's still performing well compared to other currencies. Nevertheless, the EurUsd could decline further, particularly if the dollar breaks below its lower band. Some analysts believe that the dollar will start to ease lower once the inflation peak in the US is passed.
The IMF expects inflation to drop to 2.20% in 2023, while the FOMC's projections expect inflation to fall to 2.80% in the same year.
EUR/USD forecast based on stock price target
Getting an accurate EUR/USD forecast is difficult. There are a variety of factors that affect the pair. It is important to understand these factors and weigh them in order to make a sound decision.
The European Central Bank (ECB) has been a main driving force behind the upward movement of the pair in the past year. Although the inflation rate in the Eurozone has declined, ECB President Christine Lagarde has said that this is not a peak. However, the ECB has indicated that more hikes will be incorporated into its plans. On the other hand, the US Federal Reserve has started a rate-hiking cycle. As the economy in the United States is stronger than Europe, the dollar has benefited. Inflation fears have increased. This leads to a “risk on” environment. The euro has also fallen in value due to the onset of a double recession.
If the euro fails to find support, the pair could drop towards the lower band of its downtrend. This could lead to a decline to 1.0100. But, if the pair breaks above the higher band, it will be likely to bounce to resistance. The EUR/USD has been in a narrow range for the past few weeks. However, the recent bounce to the upside has provided some relief for the euro. Traders should keep an eye on the global economy. If the economic sync between the world's largest economies is weak, the gains of pro-cyclical currencies may be limited in 2023.
In order to avoid losing money, it is a good idea to conduct thorough research and invest only if you are prepared to lose. Using a forex currency pair is a good way to do this.
You should always take expert advice into account, however. Some experts have stated that the EUR/USD will drop to $0.998 in 2023. While some have predicted that the pair will rise to $1.25 in the coming years, they also believe that the US economy is stronger than Europe.
So, whether you are looking to trade short-term or long-term, it is best to have a good grasp of the dynamics of the EUR/USD.