Euro forecast: Will EUR continue rising?

By Capital.com Research Team10:08 (UTC), 6 April 2023 Updated

Two €50 banknotes on a map of Europe — Rampant inflation and energy insecurity affected the euro’s value in 2022 – Photo: George Clerk / Getty Images

The euro (EUR) had a turbulent 2022, as investors rushed for safety on the prospect of a severe economic recession in Europe amid the ongoing war in Ukraine, rising borrowing costs and stubbornly high inflation.

As we move into 2023, the ECB hiked the key rate by 50bps in February and then again in March 2023.

However, the euro’s fortunes may be changing. For the last four weeks, the EUR/USD exchange rate has been up 2.5% and for the last six-months it's risen 10%.

Fresh Purchasing Managers’ Index (PMI) data released in March, showed growth across the euro zone had expanded for a second successive month, with growth accelerating to an eight-month high as renewed stability in manufacturing production was accompanied by a stronger improvement in services output.

EUR/USD live exchange rate chart

Read on for the latest euro news, as well as analysts’ euro predictions for 2023 and beyond.

How did the euro trade in 2022?

EUR/USD had a steady downtrend across the last year. It kicked off 2022 at $1.1370, then rose to $1.1495 in early February, before falling to a low of $1.0350 on 13 May – levels last seen in January 2017.

From here, the pair attempted to rebound, rising to $1.0650 at the beginning of June, before falling again and breaking euro parity with the US dollar on 13 July, marking a 20-year low.

EUR/USD rebounded to $1.036 by 11 August, but the growth would be short-lived. The currency pair slid down sharply in the space of a week, breaking parity once more on 22 August.

It then fell below the 99-cent mark, hitting a 20-year low of $0.9881 on 5 September, as Russia indefinitely halted supplies of gas via its main pipeline to Europe.

The currency pair then embarked on a five-day rally spurred by the ECB’s 75 bp hike, peaking at $1.01977 on 12 September before sliding below parity once again, reaching a YTD low of $0.9596 on 27 September.

EUR/USD closed the year above parity once again at $1.0726, having sustained growth of 9.4% over a period of three months.

What has been driving the euro?

Slowing growth and inflation

Euro area inflation - as measured by consumer price inflation, fell to 8.5% in February, data shows that it was down from 8.6% the previous month.

Despite this drop, analysts suggest that there is still a need for continued hawkishness from the ECB, and a possible cooling of rate hikes from the US Federal Reserve, which could be positive for the euro.

In addition, the threat of high energy prices in the euro zone has also dimmed, due to a mild winter in much of northern Europe.

“The euro is trading within its late December range, but incoming data since the beginning of 2023 suggest to us that it should be stronger,” Steve Englander, head of global G-10 FX research at Standard Chartered.

“Both euro area core inflation and economic surprises have continued to strengthen, making it easier for the European Central Bank to maintain a hawkish tone.”

PMI data showed that Eurozone Composite Output Index was at 52, versus January's figure of 50.3. This was a eight-month high. Business activity, for the same period was at 52.7, again, another eight-month high.

Commenting on the Eurozone Composite PMI data, Chris Williamson, chief business economist at S&P Global Market Intelligence, said:

“A resounding expansion of business activity in February helps allay worries of a eurozone recession, for now. Doubts linger about the underlying strength of demand, especially as some of the February uplift appears to have been driven by temporary drivers, such as unseasonably warm weather and a marked improvement in supplier delivery times – likely linked in part to China’s recent reopening.”

“Nevertheless, there are clear signs that business confidence has picked up from the lows seen late last year, buoyed by fewer energy market concerns, as well as signs that inflation has peaked and recession risks have eased.”

Euro forecast 2023

For the EU as a whole, including those countries not in the euro, the growth forecast was raised to 3.3% in 2022 (up from 2.7% in June) but revised down to 0.3% in 2023.

The eurozone economy is expected to take a downturn at the end of the year and into 2023, with many economists expecting a recession as high inflation squeezes consumers’ real incomes and company margins.

Economists expect the region’s economy to contract by 0.4% in the fourth quarter of 2022, and by 0.3% in the first quarter of 2023, according to a consensus forecast from FactSet and quoted by Dow Jones’s Xavier Fontdegloria.

Analysts at JP Morgan have predicted that the EUR/USD forecast for 2023, will see it reach 1.10 in March 2023, before declining to 1.08 September 2023 and holding at 1.08 in December 2023.

Morgan Stanley FX strategists cut their 2023 year-end forecast for the USD due to inflation uncertainty. Morgan Stanley's new forecast sees EUR/USD at 1.15 by year-end, a revision to their previous forecast of 1.08.

Strategists at Bank of America (BoA) are more optimistic and believe the EUR will strengthen aganist the dollar in 2023.

“We expect EURUSD to strengthen to 1.10 by end-2022, but with many risks. EURUSD has already moved to the consensus end-2023 forecast and very close to ours. The periphery remains a concern for the EUR, as the ECB has now turned hawkish. Energy prices could increase again. The war in Ukraine remains a known unknown. China’s reopening is proving challenging,” the BoA strategists wrote to clients.

From the valuation standpoint, the EUR is “undervalued,” the strategists added.

European Central Bank rate rises

At the June ECB meeting, policymakers pre-committed to a rate hike – the first in over a decade – as central bank president Christine Lagarde, as well as the institution’s policymakers, looked to fight inflation.

In its first meeting of 2023 on 2 February, the ECB raised all three rates by another 50bps. The rise took the deposit facility to 2.5%, the refinancing rate to 3% and the marginal lending to 3.25%, a level not seen in 14 years.

According to a press release by the ECB, the bank will continue to take aggressive measures to fight inflation, which could indicate potential support for the euro:

“The Governing Council will stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target. Accordingly, the Governing Council today decided to raise the three key ECB interest rates by 50 basis points and it expects to raise them further. In view of the underlying inflation pressures, the Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy.”

Energy crisis

The euro dipped below the 99-cent mark on 5 September as Russia exacerbated the continent’s energy crisis by shutting off its main gas artery to Europe, the Nord Stream 1 pipeline, thus setting the stage for a cold winter ahead for businesses and households in the region.

However, the International Energy Agency (IEA) announced in January 2023, that Europe had made “impressive progress” in 2022 of reducing its reliance on Russian gas supplies and making sure it had enough gas in storage.

But danger remains. Russian gas deliveries could be “considerably lower” in 2023 – or drop to zero. This could create an even bigger gap in European and global gas supplies than in 2022.

Competition for supplies of liquified natural gas (LNG) could also increase, if demand from China picks up. There’s also no guarantee that Europe’s mild winter temperatures will continue.

As a result, the European Union could face a shortage of 30 billion cubic metres of natural gas in 2023.

Euro forecast: Price prediction for 2023 and beyond

Given rising inflation, slowing growth expectations and the fact that the ECB is commited to continuing to hike rates, where do analysts see the euro going over the coming months and years?

In his foreign exchange analysis from 8 February, ING Group’s Francesco Pesole believed the EUR/USD pair could dip in the near future:

“We think that further explorations below 1.0700 are possible in the coming days, but it looks like they will mostly depend on dollar moves.”

In a more broad overview of FX markets in 2023, ING’s Pesole, Chris Turner and Frantisek Taborsky said that EUR/USD would set the tone for European currencies in the coming year, potentially ending the year at the parity mark:

“FX markets in 2023 will see fewer trends and more volatility. We say this because conditions do not look to be in place for a clean dollar trend – no ‘risk-on’ dollar decline nor ‘risk-off’ dollar rally. And central banks tightening liquidity conditions through higher policy rates and shrinking balance sheets will only exacerbate the liquidity problems already present in financial markets. Volatility will stay high.

“Softening global activity and trade volume growth at less than 2% will likely limit the gains of pro-cyclical currencies in 2023. EUR/USD could be ending the year near 1.00. If the positive correlation between bonds and equity markets does break down next year, it will likely come through a bond market rally. Our forecast for US 10-year Treasury yields at 2.75% year-end will argue for USD/JPY to be trading at 130 or lower.

“EUR/USD will set the tone for European currencies in general.”

ING recently adjusted its EUR/USD forecasts, projecting the pair to trade at:

$1.08 by Q1 2023
$1.13 by Q2 2023
$1.15 by Q3 2023.
$1.12 by Q4 2023.
$1.15 by Q1, Q2, Q4 2024.

In his Daily FX Update from 8 February, Shaun Osborne, chief foreign exchange strategist at Scotiabank, commented:

“EURUSD losses appear to be steadying around the 1.07 point as markets mull the USD’s recent gains and the policy outlook in the Eurozone and the US. We think the relatively hawkish messaging from the ECB will serve to keep the EUR underpinned in the short run and that losses to the 1.07 area may provide an opportunity for bargain-hunters to step up to re-establish long positions that were squeezed out by the past week’s volatility.”

Technically, Osborne was neutral on the pair, saying: “The EUR formed a strong “doji” (stalling) candle right around yesterday’s test of the 55-day MA (1.0671). The signal’s emergence at a relatively influential and widely-followed benchmark warrants attention. The EUR sell-off has at least stabilized; intraday gains through 1.0765/70 should see spot pick up a little more support towards 1.08.”

In its Precious Forecast for 2023, German firm Heraeus, in collaboration with SFA Oxford, said the following of the EUR/USD outlook:

“The period of dollar strength may be nearing an end. The US dollar strengthened significantly during 2022, but historically the dollar has not sustained such large gains. After the euro strengthened slightly to 1.15 in early 2022, the dollar gained the upper hand, with the euro first falling below parity in July and reaching a low of 0.97 in September.

“Next year, the euro is expected to strengthen and trade between 1.12 and 0.92. Near term, the euro could depreciate a bit more as the Fed is likely to raise rates further. However, considering the historical tendency for the euro to rebound after rapid and significant depreciations against the dollar, the euro is likely to appreciate against the dollar next year.”

As of 8 February, algorithm-based forecaster Wallet Investor predicted the pair could trade at a maximum rate of $1.084 by March 2023. The platform’s euro forecast for 2023 saw the pair experiencing a potential decline and trading at an average of $1.064 by December.

Euro forecast 2025

In the longer term, its euro forecast for 2025 saw the rate falling to come in at an average of $1.022 by the end of the year.

AI Pickup’s forecast for 2023 saw the EUR/USD pair averaging around $1.17, before rising to $1.29 in 2024, $1.37 in 2025, and $1.42 in 2026. The platform’s euro forecast for 2030 suggested a EUR/USD rate of $1.16, expecting the pair to continue rising in the years following 2028. It forecast the rate could average $1.19 in 2031 before edging up to $1.35 in 2032.

When looking at EUR forecasts, remember that analysts can and do get their predictions wrong. Always do your own research and consider the latest market trends and news, technical and fundamental analysis, and expert opinion before making any investment decisions. Never invest money you cannot afford to lose.

FAQs

Why has the euro been rising?

The euro has been rising on the back of aggressive action by the European Central Bank (ECB), moderately positive economic news in the eurozone, and the slowing of the US Federal Reserve’s (Fed) interest rate hiking cycle, which could reduce the dollar’s attractiveness as a safe-haven asset.

Will the euro go up or down?

The outlook for the euro is tied to the health of the region’s economy. While the near-term outlook is deteriorating, once stagflation has passed, the euro could rise.

When is the best time to trade euro?

You can trade the euro 24 hours a day. However, the best times to trade are around 08:00 to 10:00 local time, when economic data tends to be released. The 12:00 to 16:00 window is when the US and European markets are open and liquidity is high.

Is euro a buy, sell or hold?

Whether the euro is a buy, sell or hold depends on the economic outlook for the euro area and whether the European Central Bank (ECB) is likely to act to tighten or loosen monetary policy.

Different trading strategies will suit different investment goals with short or long-term focus. Remember, currency markets are highly volatile – you should do your own research and never invest money you cannot afford to lose.