![]() ![]() What has been driving the USD? Hawkish US Federal Reserve In a statement, the central bank indicated that further interest rates could be expected this year, vowing to “stay the course in raising interest rates significantly at a steady pace”. The hike brought the key interest rate to 2.5%. On 2 February, the ECB raised intererst rates once again by 50bps, its first hike in 2023. Lane, Member of the ECB's Executive Board projects a substantial decline in inflation later in 2023 that extends into 20. Headline inflation in the euro zone came in at 8.5% in January, compared to December's rate of 9.2%. Inflation in the euro zone dropped for a third consecutive month in January on the back of a significant fall in energy costs. However, Englander also pointed out that the data surprises in the US have been “middling to weaker” than in Europe, indicating less upward pressure on rates. ECB policymaker Robert Holzmann told a conference in January that “policy interest rates will have to rise significantly further to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target.” Rising inflation has pushed the ECB to adopt a more hawkish stance and this has continued into 2023. There’s also no guarantee that Europe’s mild winter temperatures will continue.Īs a result, the European Union could face a shortage of 30 billion cubic metres of natural gas in 2023. The IEA has stated that competition for supplies of liquified natural gas (LNG) could also rise, if demand from China picks up. This could create an even bigger gap in European and global gas supplies than in 2022. Russian gas deliveries could be “considerably lower” in 2023 – or drop to zero. However, the IEA states that danger remains on the horizon. EUR/USD exchange rate has been up over 5%, since September, when Russia halted supplies of gas via its main pipeline to Europe. The International Energy Agency (IEA) reported in January 2023 that Europe made “impressive progress” in 2022 in reducing its reliance on Russian gas supplies and making sure it had enough gas in storage. “Both euro area core inflation and economic surprises have continued to strengthen, making it easier for the European Central Bank to maintain a hawkish tone.” The pair benefited from a general dollar weakness as inflationary pressures in the US continued to ease, while the ECB lifted interest rates by 50 basis points ( bps) as expected on 15 December, reiterating that more hikes will follow and outlined plans for quantitative tightening. The ECB’s interest rate decision on 27 October did little to support the euro, with the currency falling below parity up until 3 November.Ī weaker dollar and falling US Treasury yields drove EUR/USD back up to trade around the $1.06 level in mid-December. The pair peaked again at at $1.0317 on 12 September, before falling on 27th September to its lowest point of 2022 at at $0.95892. On 5 September, the pair dipped below the $0.99 level for the first time in two decades as Russia shut down its main gas pipeline to the EU, further destabilising the economic outlook in the eurozone. EUR/USD then went on a brief rally influenced by the ECB’s interest rate decision on 8 September. At the start of June the currency pair rose to $1.0790, before declining again in the same month to $1.04. The pair rose to a high of $1.1495 in early February before steadily dropping to $1.0380 on 13 May – a level last seen in January 2017. What lies ahead for EUR/USD, as it continues to rise further away from the parity level? How did EUR/USD trade in 2022? Here we look at the factors driving the currency pair and the euro to dollar forecast for 2023 and beyond. ![]()
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