EURUSD Gains As Eurozone Data Show Modest Return To Growth
EURUSD Gains As Eurozone Data Show Modest Return To Growth
The European Union’s currency strengthened against the US Dollar this morning, as a hawkish market mood and a pullback in the safe-haven ‘Greenback’ boosted appetite for the pair. It’s now trading at around $1.0432, an increase of roughly 0.6% from the previous session’s levels, as investors await the release of the US’ latest CPI data.
A modest return to growth is expected in 2022, but this increase is tempered by the negative effects of a conflict in Ukraine, which is estimated to account for around 3% of euro area foreign demand (see Chart B).
Economic data released today from the French and German economies showed a small improvement, with both Preliminary GDP and Flash GDP bouncing back above their respective estimates. But these numbers still suggest that growth and inflation remain in the doldrums, as ECB policymakers continue to keep their foot on the gas.
As a result, the ECB is likely to hike rates again in October and December this year as it continues to push forward with its plans to end loose monetary conditions and stimulate the economy. Ultimately, however, these rate hikes are unlikely to be enough to restore growth and inflation, as the eurozone remains in the grip of a pandemic, supply bottlenecks and a lack of export price competitiveness vis-à-vis its major trading partners.
Despite broad interest rate cuts by the ECB in June, growth and inflation remain subdued across the EU. And as the conflict in Ukraine and China’s Covid lockdown continue to impact investor sentiment, there is little hope that these headwinds will ease in the near future.
This has led J.P. Morgan Research to maintain a bearish outlook for the euro relative to the US Dollar, with their forecasts calling for the dollar to rise to a two-decade high in September 2022 and to approach 1.00 by March 2023. Similarly, they call for the British pound to plunge to 1.14 in March 2023 and the Euro to plummet to 0.95 in September 2023, holding at a relatively modest level of 1.00 in December 2023.
In 2023, the ECB’s baseline outlook still calls for the dollar to strengthen, but of a lower magnitude and different composition than in 2022. In particular, the ECB’s staff projections for global growth are more optimistic, with a strong positive carry-over effect partially offset by weaker dynamics stemming from the conflict in Ukraine.
Meanwhile, the ECB’s baseline forecasts for inflation are more pessimistic, with the staff estimating that prices will remain below the 2% target throughout the period. This reflects the impact of a resurgence of the ‘euro crisis’ on commodity markets, including oil and food.
While the ECB’s dovish bias is evident, there is a possibility that they could be wrong. A de-escalation of the conflict with Russia, if realized, would be worth at least 6-7% in Euro strength against the dollar, perhaps even 9-10% as it could enable the ECB to hike further.