Author: Naomi Tajitsu and Greg Ritchie
Article: Original article
Publication date: Sunday, December 4, 2022
Traders who expect a traditional rally at the end of the year might be disappointed after November, that turned out to be the best month for the euro since 2010.
As history shows, the euro has a tendency to grow against the dollar in December. But now there’s an already high bar after a surge of more than 5% that happened in November.
As it was said by Derek Halpenny, a head of research at MUFG, the seasonality of the euro is strong, but the rally of October and November might indicate that the move has started earlier than usual. Halpenny expects EURUSD falling to parity towards the beginning of 2023. He stated that no basis for a sustainable selloff of the U.S. dollar has been created yet.
The euro showed a rapid growth last month due to forecasted decelerating in the Fed rate hiking cycle that weakened the dollar. Certain data was also signalling a slowdown of the euro area’s downturn, thus raising hopes of the expected recession to be less severe than it was initially feared.
The December rally of the euro was registered in 15 of the 23 Decembers since the eurozone currency was created, with an average increase of 1.5%. This is more than double the next-best month.
Still, the risks might get higher by the middle of the month, as the European Central Bank and the Federal Reserve are both forecasted to slow down the pace of rate hikes. If the Fed continues to signal higher inflation risks, it might bring investors back to the dollar.
According to Jeremy Stretch, head of G10 FX strategy at CIBC in London, a correction in the euro is still an actual risk, considering the proximity of central banks’ key decisions in the middle of the month, when liquidity will start getting weaker.
The weather is also increasingly seen as a serious threat to the euro’s growth. There are some signs of that temperatures are about to go down in Europe, thus testing the region’s readiness for the winter amid a shortage of energy supply.
This is the risk admitted even by euro bulls, such as Nomura strategist Jordan Rochester. He expects the EURUSD pair to rise to the level of 1.08 by mid-December before reaching 1.10 in late January. He also acknowledged a necessity to be cautious with seasonal trends, taking into consideration weather and energy prices as the main risk to his forecast.
Rochester said that seasonality shouldn’t be considered the only important circumstance, as macroeconomic factors and the weather will be determining the situation in the following four weeks, citing more positive economic data of Europe and inflows into EUR exchange-traded funds. He added that it’s also necessary to closely monitor the weather forecast and natural gas futures.
As it was said by Brad Bechtel, FX strategist at Jefferies in New York, currency moves in either direction midget stronger as liquidity is getting thinner ahead of the holidays at the end of the year. Moreover, he also noted that trading this year might be put on the sidelines because of matches for the football World Cup, which will end a week before Christmas.
Bechtel stated that it might indicate a move of EURUSD towards 1.10 or even parity. He underlined that the move towards 1.00 is the more probable option, as he expects the dollar selloff to ease this month.
Forecast: a correction in the EURUSD pair.