The value of the American Dollar (USD) is slipping after reaching multi-decade highs.
After climbing by 22% between May 2021 and September 2022 against the Euro (EUR), the value of the dollar has just seen quite a significant decline since October against the single currency, as the EUR/USD is up almost 13% since then.
Is this the beginning of a durable downward trend for the USD, or will the currency bounce back?
What about the EUR? Is the single currency able to rise in 2023?
In trying to predict the foreign exchange market in 2023, the regulated CFD broker ActivTrades highlights the importance of taking into account the Federal Reserve’s more dovish or hawkish tone, the conflict in Ukraine, and how Europe will deal with its energy crisis, the re-opening of China, and the general investment climate and sentiment.
Technical analysis of the EUR/USD
Daily EUR/USD chart – Source: Online trading platform from ActivTrades
Currently hovering around 1.0841 at the time of writing, the EUR/USD is trading not far from a level unseen since mid-April 2022. Up almost 2% so far this year, the technical configuration is still positive, with the price being above the positive Ichimoku cloud.
Still, prices might be lacking bullish momentum, as they just broke below the Tenkan line with the RSI moving downwards towards its neutral zone, while the MACD histogram is showing signs of weakness.
What’s sure is that the currency pair is about to experience a busy week, full of economic data (PMI, NFP, CPI, and GDP among others) and central banks’ monetary policy meetings, which are going to trigger higher volatility that scalpers and day traders will definitely exploit with active trading.
So be ready to either avoid trading when important economic data are released or profit from short-term trading opportunities. Also, always remember to follow your money and risk management rules to better protect your trading capital!
Why has the currency pair recently increased? And is it going to last in 2023?
In July 2022, the currency pair flirted with parity. However, in September and October of 2022, the EUR/USD fell below parity for the first time in almost 20 years, as the prospect of a severe economic recession in Europe increased significantly as a result of the ongoing conflict in Ukraine, rising borrowing costs, and persistently high inflation and commodity prices.
At the same time, the American Dollar was seen as a safer asset, which attracted many investors looking to invest in safe-haven assets in such turbulent times. Not to mention that the American Federal Reserve (Fed) decided at the beginning of the year 2022 to stop its ultra-accommodative monetary policy and to accelerate its aggressively tightening cycle with strong and rapid rate hikes, supporting the value of the USD.
In the meantime, the European Central Bank (ECB) was still reluctant to increase interest rates, while the region was facing unprecedented uncertainty and rising prices due to the war in Ukraine and a difficult situation about the energy crisis in the Euro Zone area.
But since October 2022, the EUR/USD pair has been on an upward trend, reflecting a decline in the dollar’s appeal as a safe-haven asset.
Firstly, the EUR rose as the BCE appeared more and more willing to continue raising interest rates towards 2023 to fight inflation than the Fed. FOMC’s members seemed to have indeed delivered more dovish statements towards the end of last year, indicating that the Fed’s interest rate hiking cycle might slow down to be able to analyze the effect it has had on inflation so far.
Then, economic news about many European countries was also perceived as not as negative as previously expected, which supported the feeling that recession might be avoided (or might not be as bad as forecast), also thanks to the slight improvement of the European energy crisis.
Whether or not the EUR/USD is going to keep rising greatly depends on how the Euro Zone will be able to deal with its many challenges, how the Fed will decide on its monetary policy in 2023, and how global events might unfold this year.
What to watch out for when trading the EUR/USD currency pair
When trading the forex market, you need to be aware of what makes currencies move up or down, but most importantly, you need to understand the specifics behind each currency to truly understand what can influence the currency pair you’re trading.
Here are a few things you need to keep in mind when trading the EUR/USD:
Economic Data Releases
Keep an eye on key economic indicators from both the European Union and the United States, as they can greatly impact monetary policy decisions. Remember that central banks are one of the most influential actors in the Forex market.
As the ECB and the Fed both have the goal of guaranteeing price stability in their economies, inflation figures (like CPI, PPI, wage growth, and PCE) are particularly important for them and for traders.
In addition to stable prices, the Fed also works towards maximum employment, which means that job reports and other related data are important (like the ADP, the NFP, the unemployment rate, and the JOLTS figures).
Interest Rate Decisions
As we said, central bank decisions on interest rates play a crucial role in determining the direction of an exchange rate, as the rate differential is definitely influencing the demand for a specific currency compared to another one.
Decisions from the ECB and the Fed are therefore closely monitored, as are any changes to their monetary policy, particularly when it comes to interest rate decisions, which can strongly influence the currency pair.
Political Events and Statements
Political events and statements by EU and US leaders, including trade negotiations, geopolitical tensions, and speeches from central bankers can also affect the EUR/USD exchange rate, as these events can cause market uncertainty or provide indications or clues about future monetary policy decisions and impact the demand for each currency.
Market Sentiment and Risk Appetite
Global market sentiment and investor risk appetite also have a significant impact on financial assets, and the EUR/USD is no exception.
If investors are feeling positive and optimistic about the future growth of a country, they are more likely to invest in higher-risk assets and favor the currency that provides the best growth opportunities.
On the other hand, if market sentiment turns negative, investors tend to flock to safe-haven assets, which often leads to a depreciation of the EUR/USD exchange rate, as the USD is considered a safe-haven asset.
Technical Analysis and Chart Patterns
Technical analysis is also an important tool for traders in the EUR/USD market.
Keep an eye on key support and resistance levels, trend lines, and chart patterns to identify potential buying and selling opportunities that might be spotted by technical analysts (even if you’re not using technical analysis yourself), as significant price levels very often trigger a reaction from investors and prices.
For ActivTrades, it’s essential to keep in mind that there are other factors that can affect the value of the EUR/USD, such as wars, natural disasters, and other global events.
That’s why it’s crucial to regularly follow the news, as well as to always keep an eye on economic data releases of the week to stay informed of what’s happening, as well as significant economic publications that might increase volatility.
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