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Eur/usd: Why the euro may wait a very long time to rise towards the greenback

(BFM stock exchange) – The European currency has been struggling to recover against the dollar since this summer. Several consultancies do not see the euro continuing a sustainable path above $1 before the second quarter of next year.

Unheard of for over 20 years. The euro, which flirted with $1.6 14 years ago, is now worth less than the US currency. The Eurozone currency is currently trading at 0.9973

dollar, and is struggling to get back above parity after falling below this threshold in July.

If the exchange rate experiences a “roller coaster” from time to time, as on Tuesday when the euro fell from almost $1.02 to less than $1 in a few hours, several research offices believe that the single European currency still has a long way to go before a permanent recovery. above $1.

ECB delay

Swiss bank UBS, for example, sees the euro falling to 96 cents by the end of December, before rising to 98 cents by the end of March, then to $1 by the end of June and $1.04 by the end of September 2023. These projections are particularly based on the fact that the European Central Bank (ECB) is late in the cycle of raising its key inflation-fighting rates compared to its US counterpart, the US Federal Reserve (Fed). [le comité de politique monétaire de la Fed, qui se réunit la semaine prochaine, NDLR] “We believe that the next FOMC meeting will

will strengthen the argument for the weakening of the euro against the dollar”, judge UBS. [que la Fed, NDLR]”The ECB is perceived as less determined in the fight against inflation

. This tends to weigh on the euro,” note the Commerzbank currency strategists, who estimate that the single European currency should therefore benefit little or not from further ECB rate hikes.

According to their forecasts, the euro should reach 98 cents at the end of December, to remain at this level at the end of March to return to $1.02 in June, then $1.06 in September 2023 and $1.10 in December of the same years.

Macroeconomic disparities

Macroeconomic differences between the eurozone and the United States should weigh on the European currency in the coming months. According to Barclays, the Eurozone is expected to experience a major recession next year. The Bank of England forecasts growth of 3.1% in 2022 before contracting to 1.1% next year. By comparison, the United States should see its GDP decline slightly, by 0.2% this year before a slight recovery of 0.1% next year.

Barclays believes the eurozone will be hit by persistently high energy prices following Gazprom’s disruption of Nord Stream 1 gas supplies. The bank therefore estimates that the fall in GDP in the euro area will begin in the fourth quarter of 2022, and activity will only return to the green in the third quarter, with an increase of 0.1% in the quarterly variation.

“It is difficult to predict the duration and severity of the energy crisis. Therefore, the expected recession for the Eurozone is more serious than the “normal” recession predicted in the United States, caused by the Fed’s aggressive monetary policy,” Commerzbank believes.

High energy prices also mean that the current account balance of the eurozone should suffer, adds the German bank.

Recession likely

Europe is trying to find mechanisms to solve this energy crisis. On Wednesday, the European Commission unveiled proposals including taxes on energy producers as well as regulatory relief to help distributors.

But “the plans of the Commission, and especially the states to fight the energy crisis this winter in Europe, do not seem to clearly limit the economic impact of this shock,” underlined Xavier Chapard, an economist at La Banque Postale Asset Management, in a note published on Friday. “Overall, we still think that a recession in the euro area is likely, but its probability and its magnitude are probably lower than we expected,” he concludes.

Moreover, the greenback could continue to benefit from its safe-haven status in the coming months. In a note published Thursday and cited by Bloomberg, Citi strategists believe the U.S. currency is “the only safe haven to hide” in the face of the current economic downturn.

It should be noted that Nomura is even more pessimistic than the already mentioned consulting firms in terms of forecasts. The Bank of Japan estimates that the euro could fall to $0.9 at the end of 2022 and rise to $0.975 at the end of 2023.

Obviously, economic forecasts are by definition made to be thwarted. Christine Lagarde, the president of the ECB, also admitted at her latest press conference that her institution had made “mistakes” in its projections.”But those mistakes were made by all forecasters,” she recalled.

The course was discontinued on Friday in the early afternoon.Julien Marion – ©2022 BFM Bourse

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