What happens when Euro rebounds against dollar?

Euro poised for gains as dollar weakens and ECB resilient stance

By Nadia Elbilassy | @Nadia Elbilassy | 12 June 2023

EURUSD Technical analysis
  • Will we see the dollar not dominating markets as the Fed shift from their aggressive policy stance?

  • An anticipated solid recovery for the euro in the picture in the medium term

  • Gradual ECB rate hikes drive the euro's rise

  • Positive market sentiment and expectations for future currency appreciation can drive demand and push the currency's value higher

The Euro

Following a period of volatility in 2022, characterized by sanctions on Russia and an energy crisis in Europe, the euro has regained momentum. It broke above parity in November 2023 and has since entered an upward trend for 11 weeks, from October to April 2023. The euro managed to recover losses and has been trading within a broad range of 1.05 to 1.10.

The decline of the dollar, which had dominated markets due to the Federal Reserve's aggressive policy stance, is currently supporting the euro. As the Fed's stance nears its end, the euro is expected to rise while the dollar could face significant losses.

This positions the euro for moderate gains in the medium term, especially during the recovery phase. Additionally, the European Central Bank (ECB) is implementing rate hikes at a slower pace compared to 2023, which helps mitigate the negative impact on economic growth.

The Fed Vs the ECB:

Consequently, it is anticipated that the euro could potentially reach levels of $1.10 in the summer and further strengthen to $1.14 by the end of 2024. At a recent ECB meeting, Christine Lagarde expressed a commitment to gradually tighten monetary policy. The hawkish comments from other ECB members indicate a likelihood of raising interest rates sooner to address inflationary pressures.

The evolving hawkish stance within the ECB suggests an increasing potential for the euro to appreciate in value. This shift presents the euro with two equally favorable alternatives for its upward movement. Firstly, a sustained hawkish stance by the ECB would contribute to the appreciation of the currency.

This implies that the central bank would adopt tighter monetary policies, including potentially raising interest rates, to address inflationary pressures. Such actions typically strengthen a currency.

Secondly, the euro could benefit from the low impact of the dollar's strength, as well as the relatively low inflation levels within the Eurozone. If the dollar's influence on global markets diminishes while inflation remains subdued in the Eurozone, it can create a conducive environment for the euro to appreciate.

Both factors—favorable ECB policies and the relative position of the euro compared to the dollar contribute to the increasing idea for the euro to appreciate in value.

On the Data Side:

Inflation has fallen with the Eurozone’s core inflation rate, which excludes energy, food, alcohol, and tobacco, declining to 5.3% from 5.6%, which was below the anticipated level of 5.5%. This decrease marked the lowest core inflation rate since January. (its a good thing)

The Eurozone's entry into a recession at the beginning of the year, marked a contraction of 0.1% for two consecutive quarters, raising speculation about the potential movements of the euro, so it's important to consider other factors influencing the currency.

German exporters have been heavily affected by various challenges including the uncertainty caused by the war in Ukraine, escalating costs of raw materials and energy, rising interest rates, and a slowdown in Germany's trading partner, China. These factors have dampened hopes for a swift recovery in Germany.

However, if we were to weigh what’s really moving markets, it remains the central bank monetary policies on top. Which both the Fed and the ECB are in favour to the euro heading in an upward trajectory.

In conclusion, the strengthening of the euro, will follow through positive effects on the economic recovery of the Eurozone as it would result in reduced costs of foreign products, increasing purchasing power.

On a Technical Scale:

If the 1.0740/50 area, which corresponds to the 100 SMA and the Fibonacci 23.6% retracement of the recent downtrend, is confirmed as a support level, it is likely to attract the interest of buyers. In which case a bull trend will take over.

From this moment forward if the euro was able to break the 1.08 area which aligns with Fibo 38.2% retracement, it could attract further buyers pushing prices to 1.0850 and 1.0875. Aligning with Fibonacci 50% retracement level.