Yesterday, EUR/USD went up again, reaching a high of 1.0595 at noon, but then it went down to a low of 1.0477 this morning.
Positive feelings about a possible reopening of the Chinese economy and a weaker dollar due to the possibility of a slower rate hike by the Fed helped the EUR/USD at the start of yesterday’s trading day. However, profit-taking stopped the rise as the currency pair got close to the important 1.06 level.
The dollar is helped by U.S. data, which hurts EUR/USD.
Strong U.S. data like the services PMI index, industry orders, and ISM services PMI all came in above expectations, which helped the dollar and sped up the fall of the EUR/USD.
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Shortly after these reports came out, an article by Nick Timiraos, a Fed expert at The Wall Street Journal and the person who is thought to know the most about the central bank’s plans right now, gave the dollar bulls more reasons to be optimistic.
Timiraos wrote that the solid wage gains shown in last week’s NFP report could lead the Fed to keep raising wages at higher-than-expected rates.
He also said that the U.S. CPI report on December 13 is a key event that could lead to another 50 basis point hike in February if the numbers are better than expected. Right now, the market’s base case for the February FOMC meeting is a 25 basis point rate hike.
Banks don’t think the EUR/USD will keep going up.
Now that the EUR/USD has started to correct since yesterday, the question is whether this is just a breather or if a bigger correction is to be feared for the rest of December.
Seasonality favours the upside, as the EUR/USD has had a positive monthly balance (averaging +1.5%) in 15 of the 23 December months since the creation of the single currency.
But even though the EUR/USD jumped more than 5% in November, making it the best month since 2010, there is a chance that the immediate bullish potential has already been used up and a correction is coming.
“The seasonal euro bias is strong, but the rally in October and especially in November may mean that the move has started earlier than usual,” said MUFG analyst Derek Halpenny, who was quoted by Bloomberg.
He thinks that EUR/USD will go back to being equal to each other in early 2023. “The fundamentals for a sustained selloff of the US dollar are not really in place yet,” he said.
ING Bank, for its part, said that problems caused by rising energy prices could come back to the fore, which would hurt the euro.
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“Given that EUR/USD is very sensitive to the terms of trade in the eurozone, which are mostly driven by energy prices, further upside risks for energy commodities mean downside risks for the euro,” ING wrote.
Lastly, it’s important to note that not all banks agree. Yesterday, Société Générale wrote, “Year-end short covering and the market’s tendency to be optimistic about 2023 should help the euro.” They suggested buying the EUR/USD pair with a goal of 1.10 by the end of the year.
