EUR/AUD forecast: Prospects of Euro appreciation look slim
Having fallen to trade at near parity against the US dollar, the euro has been the most notable foreign exchange loser in 2022.
Looking at the EUR/AUD pairing, the euro’s underperformance is quite evident. The European Central Bank’s (ECB) hesitation in hiking interest rates before the July meeting and Europe’s geopolitical woes have resulted in widespread weakness in the euro against nearly all G-10 currencies.
In this article we take a look at European and Australian economies and other factors shaping a EUR/AUD forecast for 2022 and beyond.
Price movement: EUR/AUD trade in 2022
Australians planning to travel across Europe may find 2022 a favourable time to make that trip. In the first seven months of 2022, the euro lost 6.5% against the Australian dollar.
The start of the Russia-Ukraine war was arguably the biggest reason for the euro’s underperformance against its global peers in 2022.
The European Union (EU) economy has been affected more than most due its close proximity to the war and its over-dependence on Russian energy imports.
Investor angst was evident in the month of February 2022 as the EUR/AUD rate closed the month 2.8% lower.
Losses extended into April 2022 as the Euro fell 4.2% against the Australian Dollar, the biggest monthly EUR/AUD fall since the pandemic-induced crash in April 2020.
Most notably, the euro fell to a five-year low against the Australian dollar in April 2022 as EUR/AUD rates dropped to 1.43.
A brief rally in EUR/AUD in May and June came to an end in July as a host of new problems came to light in Europe, including political unrest in Italy and Russia’s threat to cut natural gas supplies to the European bloc.
The EUR/AUD exchange rate saw its second worst month of the year in July, ending the month 3.6% lower at 1.46.
Central bank policies: ECB vs RBA
Interest hike cycles have been the talk of the year amid widespread inflationary pressures. When you compare the monetary policies of the two central banks in question – ECB and Reserve Bank of Australia (RBA) – there has been a wide contrast in the pace of tightening from the two principal banks.
As of 3 August 2022, the RBA has hiked rates by 175 basis points in four consecutive months between May and August to take Australia’s cash rate up to 1.85%.
On the other hand, the ECB has been late to join its global peers in tightening monetary policy. The ECB raised interest rates by 50 bps in July to take borrowing rates to 0%, bringing an end to eight years of negative interest rates.
The ECB and RBA are expected to conduct more rate hikes in 2022 and both central banks have stated to take a flexible, data-dependent approach to decide the size and pace of future hikes.
UK-based advisory firm Oxford Economics expected both the ECB and RBA to hike rates by 50 bps in September 2022. According to Sean Langcake of Oxford Economics, the RBA has confirmed that it sees the neutral policy rate “at or just above 2.5%”.
Meanwhile, Piero Cingari, market analyst at Capital.com, highlighted ECB president Christine Lagarde’s statement after a 50 bps rate hike in July when she said: “We may accelerate the exit, but not the point of arrival.
“She was alluding to the fact that accelerating the hikes in the near term does not necessarily lead to a higher terminal rate at the conclusion of the hiking cycle,” said Cingari.
Rate hike path: ECB and RBA take data-driven approach
On 2 August, the RBA stated that it is not on a “pre-set path” in its process of normalising monetary policy while the ECB voiced a “data-dependent” policy rate path in July. Global central banks are looking to economic data to be their guide in 2022.
Preliminary flash gross domestic product (GDP) data reported a 0.6% quarter-on-quarter growth in the second quarter of 2022 for the EU region.
A closer inspection revealed three member states – Portugal, Latvia and Lithuania – posted negative economic growth in the June quarter. More importantly, EU economic powerhouse Germany reported a flat quarterly economic growth for the second time in four quarters.
Retail sales in the EU posted another round of contraction in June with the sharpest decline seen in Germany and Netherlands, indicating the high inflation is starting to bite consumer wallets.
In Australia, the RBA has become increasingly wary of inflation. There was an evident change in tone in the monthly statement from the RBA governor Philip Lowe.
Gone was the language from July that referred to Australia’s inflation being “not as high as it is in many other countries”. Instead, governor Lowe highlighted the highest inflation Australia has seen since the early 1990s and raised the central bank’s consumer price index (CPI) inflation forecast to 7.75% in the latest RBA meeting held on 2 August 2022.
The RBA also lowered its GDP forecast to 3.25% from 4.25% for 2022 and cut its GDP forecast for the following two years to 1.75% from 2%. Australia’s second quarter GDP report is expected to be released on 7 September 2022.
The weakness of the euro against the Australian dollar seems to indicate a bearish EUR/AUD forecast, as investors expect the island nation to showcase better economic growth compared to its European counterpart. Capital.com’s Cingari summed up the market sentiment on 3 August 2022:
Energy crisis: Australia in a better place than Europe
The most important topic when discussing the euro and the EU’s near-term economic stability is the bloc’s dependence on Russian energy imports.
Russia was the biggest exporter of natural gas and oil to the EU in 2020, Eurostat figures show. The EU imported about nearly half of its entire natural gas supply from Russia in 2020.
The Nord Stream 1 pipeline that runs under the Baltic Sea from Russia to Germany is a key natural gas infrastructure that has constantly garnered headlines since the start of the Russia-Ukraine war.
In June 2022, the Nord Stream 1 pipeline cut its gas deliveries to Europe by 75% under the orders of its majority shareholder Gazprom, a Russian state-owned company. In July, the pipeline was completely shut off for about 10 days for planned annual maintenance works, as noted by Nord Stream.
The European Commission has already told its member states to cut natural gas usage by 15% until March 2023 following Russian president Vladimir Putin’s warning of further reducing gas supplies via the Nord Stream 1 pipeline.
ING said in a note further significant cuts in gas flows and voluntary additional demand reductions will send the EU into a “full-blown recession”.
In contrast, Australia is expected to remain shielded from Russia-related energy problems. The nation has abundant energy resources and is a leading exporter of liquified natural gas, coal and uranium.
EUR/AUD forecast: 2022 and beyond
Data provider Trading Economics suggested that EUR/AUD rate could rise to over 1.47 by the end of September, according to its euro to Australian dollar forecast, as of 3 August. Trading Economics added that it saw exchange rates at 1.49 in one year’s time in its EUR/AUD prediction.
Wallet Investor’s algorithm-based EUR/AUD forecast for 2025 saw the exchange rate closing the year at 1.31. Wallet Investor did not give an EUR/AUD forecast for 2030.
Note that analysts and algorithm-based EUR/AUD forecasts can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence. Remember that your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size and goals. And never invest money that you cannot afford to lose.
FAQs
Why has EUR/AUD been dropping?
The euro has weakened against the majority of G-10 currencies in 2022 on weak economic growth outlook, the ECB’s slow start to rate hikes and a European energy crisis.
Will EUR/AUD go up?
Data provider Trading Economics suggested that EUR/AUD rate could rise to over 1.47 by the end of September, according to its euro to Australian dollar forecast, as of 3 August. Trading Economics added that it saw exchange rates at 1.49 in one year’s time in its EUR/AUD prediction. Note that analysts and algorithm-based EUR/AUD forecasts can be wrong. Forecasts shouldn’t be used as a substitute for your own research.
When is the best time to trade EUR/AUD?
The best time to trade any security is after you have done your research. Always conduct your own due diligence and remember that your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size and investment goals.
Is EUR/AUD a buy, sell or hold?
Data provider Trading Economics suggested that EUR/AUD rate could rise to over 1.47 by the end of September, according to its euro to Australian dollar forecast, as of 3 August. Trading Economics added that it saw exchange rates at 1.49 in one year’s time in its EUR/AUD prediction. Note that analysts and algorithm-based EUR/AUD forecasts can be wrong. Forecasts shouldn’t be used as a substitute for your own research.
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