Eur/usd: Why the euro may have to wait a long time to rise against the dollar

(BFM Bourse) – The European currency has struggled to regain ground against the greenback since this summer. Many consultations do not see the euro continuing a sustainable trajectory above 1 dollar before the second quarter of next year.

Not heard for over 20 years. The euro, which flirted with 1.6 dollars 14 years ago, is now cheaper than the American currency. The Eurozone currency is currently trading at 0.9973

dollar, and has struggled to get back above parity since it fell below this threshold in July.

If the exchange rate experiences a roller coaster from time to time, like on Tuesday when the euro fell from nearly 1.02 dollars to less than 1 dollar in a few hours, many research offices believe that a European currency still has a long way to go. returns permanently above 1 dollar.

The ECB’s delay

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

will strengthen the case for a weakening of the euro against the dollar”, judges UBS. [que la Fed, NDLR]”The ECB is considered less determined in the fight against inflation

. It is likely to weigh on the euro”, note for their part the currency strategists of Commerzbank, who judge that a European currency should not or little benefit from the next ECB rate hike.

According to their forecasts, the euro should reach 98 cents at the end of December, remain at this level at the end of March before returning to 1.02 dollars in June then 1.06 dollars in September 2023 and 1 ,10 December of the same year.

Macroeconomic disparities

The macroeconomic divergence between the euro zone 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 British bank expects growth of 3.1% in 2022 before a decline of 1.1% next year. In comparison, the United States should record a small decline in its GDP, which is 0.2% this year before a small rebound of 0.1% next year.

Barclays believes the eurozone will be hurt by continued high energy prices following the disruption of gas deliveries through Gazprom’s Nord Stream 1 pipeline. The bank thus decided that the reduction of GDP in the euro zone will begin in the fourth quarter of 2022 and the activity will only return to the green in the third quarter, with an increase of 0.1% in the quarterly change.

“The duration and severity of the energy crisis is difficult to predict. Therefore, the expected recession for the Eurozone is worse than the “normal” recession expected in the United States, caused by the aggressive monetary policy of the Fed “, considered by Commerzbank.

High energy prices also mean that the balance of the current account in the euro zone should suffer, added the German bank.

A possible recession

Europe is trying to find mechanisms to solve this energy crisis. The European Commission on Wednesday presented proposals including taxes on energy producers as well as regulatory relaxations to help distributors.

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

In addition, the dollar may still benefit from its status as a safe haven in the coming months. In a note published on Thursday and cited by Bloomberg, Citi strategists believe that the US currency “is the only safe haven” in the face of the current economic downturn.

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

Obviously economic forecasts by definition are made to fail. Christine Lagarde, the president of the ECB also acknowledged in her last press conference that her institution had made “mistakes” in its projections.

The course stops on Friday at the beginning of the afternoon.Julien Marion – ©2022 BFM Bourse

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