(News Bulletin 247) – The euro zone currency has exceeded $1.10 and could rise even higher in the coming months, due to the ECB’s delay in its monetary tightening cycle.

Mistreated last year by the dollar, like the other major currencies, the euro has had a bumpy ride against the greenback since the beginning of the year.

The currency of the euro zone first made a significant ascent, starting from 1.066 dollars to reach 1.10 dollars in February. Then the sudden scare on the banks triggered by the failure of Silicon Valley Bank (SVB) and the difficulties of Credit Suisse broke the momentum of the currency of the monetary union, the dollar benefiting from its status as a safe haven. world.

The easing of this mini-banking crisis has since put the euro back on track, with the eurozone currency well above $1.10 mid-week.

The euro is not the only currency to have appreciated against the greenback. The DXY dollar index, which measures the evolution of the currency across the Atlantic against a basket of currencies, drops 2.5%

for the month of January (while the euro appreciated by 3.3% against the greenback over the same period).

Can the eurozone currency rise even higher against the dollar? At first yes.

The ECB’s delay

Several factors seem to play in favor of the euro, particularly in terms of the economy. The eurozone held up better than forecasters feared. In particular Germany, the largest economy in the euro zone. The five main German economic institutes now expect gross domestic product to grow by 0.1% in the first quarter and 0.3% for the whole of 2023, whereas they previously forecast a contraction of 0. .4%. Conversely, the latest activity indicators in the United States showed a weakening of the economy. So much so that Capital Economics considers it “probable” that the world’s largest economy will fall into recession during the year.

The other major determinant of changes in currency parities remains the change in interest rates and therefore implicitly the monetary policy decisions of the major central banks. However, the European Central Bank (ECB) is “less advanced than the Fed (Federal Reserve) in its rate cycle”, recalls Swiss Life Asset Managers.

“Monetary policy should be less of a support factor for the dollar, especially against the euro, as the European Central Bank is expected to maintain an aggressive monetary policy against inflation and oppose dollar strength,” judge for his part Ofi invest asset management. “The ECB is hardly close to the end of its cycle” of monetary tightening, abounds UBS.

A hard-to-reach balance at $1.25

According to the CME Group’s FedWatch tool, investors are mostly expecting a further 25 basis point (0.25%) Fed rate hike at its next meeting in May. But, according to these expectations, this increase would be the last before even possible declines during the year. The European Central Bank (ECB) still has some way to go to bring inflation back to an acceptable level, ie on a trajectory allowing inflation to return to around 2% over an acceptable horizon. Its president, Christine Lagarde, had also recognized this during her press conference in March, noting however that the central bank should also take into account the potential impacts of recent tensions on the banks.

All of these elements plead for a rise in the euro over the next few months even though the European currency should not move in a straight line. [dollar, NDLR] “We still believe that in the long run the euro has real potential to break out above 1.10 […]possibly peaking at 1.15 this year (which is expected by most corporate treasurers). But it’s not the right time yet. In the short term, we believe that profit taking could occur

“, considered William Gerlach, regional director France and United Kingdom within iBanFirst, in a note published last week.

For its part, the bank UBS estimates that the euro could return to $1.12 at the end of December and to $1.14 at the end of March 2024. “However, a strong rebound in exports is necessary for a sustainable recovery towards the equilibrium of the economy. ‘eurodollar around 1.25, which we believe will not happen in the next 12 months.

In a note published on Friday, Deutsche Bank judges for its part that the euro can go for $1.15 or even $1.20 this year, if the dollar weakens and the Fed adopts a more accommodating tone, which which seems to him “reasonable” as hypotheses.