In simpler terms, the value of the European currency (EUR) compared to the American currency (USD) started strong in February after meetings between the Federal Reserve and the European Central Bank. The market is uncertain about the Federal Reserve's plans to raise interest rates and is putting more trust in the European Central Bank's plans to keep rates low. This uncertainty has affected the value of the USD and made the EUR a more attractive investment. However, the Federal Reserve may change their plans in March and this may affect the value of the currencies. Some investors are avoiding long-term investments in European bonds, causing yields to remain at lower levels. This is due to differences in plans between the Federal Reserve and the European Central Bank

Most salient to the story has been the continuing softening in US price pressures – prompting Federal Reserve Chair Jerome Powell to declare ‘the disinflation process has started’. Our team looks for core US inflation to fall even more sharply in the second quarter. This can send EUR/USD 1.15.

Lower natural gas and China’s reopening have prompted global growth to be revised higher. That’s good news for the Euro. A hawkish European Central Bank can also see yield differentials lift EUR/USD.

The main risks stem from sticky US inflation, energy, and China. US debt ceiling negotiations may well prove a challenge in the third quarter too.

EUR/USD: A Change of Heart and of Forecast

Feb 10 2023

6