Euro-dollar forecasts in 2023. Is the time of the strengthening of the dollar over Europe over? Powered by Investing.com

Investing.com – In 2022, the US currency pair returned below parity, hitting a low of 0.9535 on September 28, not only the lowest of the year, but also the lowest since June 2002, more than 20 years ago.

Between the beginning of the year, when the euro was worth around $1,135, and its lowest value in late October, the annual decline ultimately totaled more than 1,800 basis points.

However, the fourth quarter of 2022 has seen a dramatic reversal so far, with EUR/USD hitting a yearly high of 1.0737 on December 15, more than 1,200 pips ahead of its yearly low, and reversing more than two-thirds of the previous 9 -month drop.within six weeks.

Also, the EUR/USD currency pair gained 10% in November alone, its best monthly performance since July 2020.

Will EURUSD’s upward reversal continue in 2023?

During late September, the strength of the dollar, which has surged this year in the face of rapid rate hikes by the Federal Reserve, weighed heavily on the EURUSD currency pair, as the European Central Bank was slower to tighten policy in the face of rising inflation.

The war in Ukraine and the energy crisis that followed also affected the European economy much more than the US economy, giving the US dollar an added advantage.

But the context is different now. A slowdown in the Fed’s rate hike schedule and moderation in US inflation (two closely related concepts) have led investors to reconsider the pair.

Indeed, if in 2022 EUR/USD suffers from the ECB lagging behind the Fed in raising interest rates, there could be a reversal in 2023, with the ECB “catching up” to the Fed, which, for its part, has already clearly indicated a turn towards a less drastic rate increase.

The difference in interest rates between the Fed and the European Central Bank is in focus in 2023

Therefore, market expectations of the interest rate differential between the Fed and the European Central Bank will be key for EURUSD in 2023. More precisely, the central question in the coming year in this sense will be whether the Fed or the European Central Bank will be the first to cut interest rates again.

In this regard, Roberto Mialic, strategist at UniCredit Forex, said: “The Federal Reserve plans to cut interest rates in 2024 at a more intense pace than the European Central Bank,” and as a result he expects “to narrow the gap between the US federal funds rate and the bank deposits.” of the European Central Bank, which will be in line with the growth of the euro exchange rate against the US dollar.

“The strong reliance of US dollar strength on rising US yields means the US currency will have to ease its grip as US yields fall again, as has already happened based on recent US CPI inflation data,” he added . .

Monetary policy is still dependent on inflation and growth

However, monetary policy at both the Federal Reserve and the European Central Bank will continue to depend on economic developments, particularly the easing of inflation and the impact of higher rates on growth.

A faster-than-expected decline in inflation in Europe or the US in the coming months should reduce expectations of a rate hike for the relevant central bank. Conversely, if the central bank’s actions appear to be insufficient to return inflation to its target, interest rate expectations may rise.

Likewise, a sharp recession in 2023 could be the reason for a faster-than-expected end to rate hikes and a move toward lower rate expectations.

And the war in Ukraine is also a double-edged “wild card” that should not be ignored. A possible end to the conflict in 2023 could be a strong bullish factor for EURUSD.

On the other hand, the impact of the war in Ukraine on the economy in Europe could worsen if Russia decides to completely cut off the continent’s gas supply. In this case, we can probably expect analysts to talk about a return below parity again.

The main bullish technical signal could soon support the growth of the EURUSD currency pair

Finally, from a chart perspective, we note that the EURUSD rally could be supported by a closely watched signal by traders that seems imminent. In fact, as we can see in the chart below, the 50-day moving average is quickly approaching the 200-day moving average.

The 50-day moving average crossing above the 200-day moving average is a key bullish technical signal known as a “golden cross”. The last time this signal was recorded, in late June 2020, EUR/USD subsequently made a gain of around 1150 pips over the next six months.

Reversing this signal, when the 50-day moving average crosses below the 200-day moving average, a signal known as the “cross of death” is triggered in late July 2021. Also, the EURUSD currency pair subsequently fell by more than 2000 pips in 14 months.

So, the rapid advance of the 50-day moving average towards the 200-day moving average will be something to watch closely between now and late 2022 and early 2023.