17.01.2023 10:50 AM
The euro is in favor, but is afraid of getting weaker. The dollar is dreaming of a rebound, gradually gaining strength

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The US currency is working hard to stay afloat and not slide to the lowest levels. Nevertheless, the greenback occasionally slumps, unwittingly giving a chance to the euro. The latter willingly uses this opportunity and tries to rise as much as possible, having accumulated a certain amount of growth.

The greenback started the week lower, hitting a 7-month low against other currencies, but stabilized later on. On Monday evening, January 16, EUR/USD soared to a new 9-month high of 1.0874 but then pulled back to the critical 1.0816 mark. As a result, the pair lost 0.16%, but started recovering by the next trading session. On Tuesday morning, January 17, EUR/USD traded in the range of 1.0829-1.0830, having partly recouped its earlier losses.

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According to analysts' estimates, the technical situation has stabilized slightly. At a certain moment, the pair reached the highest level since April 2022, but then retreated to the lower limit of the current range. This is because risk appetite has decreased, which supports the dollar and is a "headwind" preventing the euro's growth.

Disappointing US macro data, published last week, contributed to the dollar's downfall. Recall that in December 2022, US consumer prices fell for the first time in more than 2.5 years. This had a significant impact on the greenback, as aggressive Federal Reserve rate hikes were the key driver of its growth (by 8%) in 2022.

The US currency is gradually recovering from a seven-month low. This puts significant pressure on the EUR/USD pair. Traders and investors are worried about the economic problems triggered by the outbreak of COVID-19 in China, as well as the protracted Russian-Ukrainian conflict. This increases fears about the global economic downturn and restrains optimism in the markets. In such a situation, experts record a massive outflow of capital to USD as a safe asset. This limits the euro's growth and worsens its future prospects.

On the bright side, US inflation is gradually easing, which recently reached its highs in the last 40 years. Against this background, investors expect the Fed to pause rate hikes. In addition, market participants believe that interest rates will not be raised immediately, but gradually and by a certain amount. Most economists (91%) expect a 25bp hike and only 9% expect a 50bp hike.

According to experts, a significant recovery of the dollar is still elusive. Market participants used to be confident that the Fed would soften its hawkish stance after seeing signs of continued easing of inflation pressures. However, assumptions that the central bank is close to ending its rate hikes were not justified. At the moment, it will probably continue to raise rates, but may slow the pace of rate hikes (only by 25 basis points in February).

According to economists at Deutsche Bank, most of the current factors are in favor of a continued decline in the greenback and a relative stabilization of the euro. A combination of China's economic reset after the removal of covid restrictions and an improving energy situation in the EU have set the USD back. In addition, recent hawkish statements from the European Central Bank have provided support for EUR/USD and the euro. At the same time, there is growing confidence in the markets that inflation in the US will peak, so EUR/USD could rise to 1.1500 in 2023 and the dollar could remain in a downtrend.

Larisa Kolesnikova,
Analytical expert of InstaForex
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