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EUR/USD Exchange Rate: Forecast of 2022

Updated on March 09, 2022 12:00 am
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The currency pair EUR/USD (Euro against US dollars) is the most widely-traded pair in the foreign exchange market. Hence, it is the most liquid currency pair. In other words, EUR/USD can be bought and sold without a significant change in its exchange rate in the world.

The currency pair is important in the Foreign Exchange Market (also known as Forex, FX, or currency market) as it covers two of the biggest economies in the world: European and American, accounting for half of the total trading volume in the Forex market.

Before we dive deeper into performance expectations of EUR/USD, let's first understand how to read the EUR/USD pair.

The EUR/USD pair denotes the number of US dollars to buy 1 Euro. For example, the quotation EUR/USD= 1.13 means that it takes 1.13 US dollars to buy 1 Euro.

  • EUR, the first listed currency, is the base currency,
  • and the USD, the second listed currency, is called the quote currency.

When an order is placed for a currency pair, the base currency is bought, and the quote currency is sold.

The EUR USD exchange rate is affected by the economics of demand and supply in FX markets for the pair, political events, government policies, etc.

Keep in mind that the exchange rate EUR to USD is not the only factor that can influence the amount of money being sent from the U.S. to Europe. If you are sending money USD to a EUR account, compare the transfer fees and transfer speed, in addition to the exchange rate.

Factors Affecting EURO USD Exchange Rate

The Central Banks of Europe and the United States

The European Central Bank (ECB) and the Federal Reserve Bank (Fed) control the monetary policy, regulate the money supply, interest rates and, as a result - influence the strength or weakness of the currency of the European Union and the United States, respectively. This, in turn, creates volatility in the Forex market. Volatility measures the drastic changes in the market's price.

Markets actively follow press conferences of the heads of the ECB and the Fed and comments by leading politicians from the two regions that can provoke significant changes in the value of the currency pair.

Interest Rates

According to the economic theory called the International Fisher Effect, the foreign currencies with relatively high-interest rates will tend to depreciate. Higher interest rates mean a high inflation rate which causes the currency to depreciate against a country with lower interest rates.

This practicality of the theory is contested but widely cited to explain the influence of interest rates in the Forex market.

Political Influences

Political instability and uncertainty create volatility in the value of the currency of a country. For example, Brexit caused chaos with the pound/ GBP, and Trump's victory spiked the dollar value. Crisis in the Eurozone, election results, or major political events can affect the USD to euro exchange rate.

Following the Russian military invasion of Ukraine, the EUR/USD pair has hit the lowest level since May 2020, further boosting the US dollar.

The ongoing military action in Ukraine by Russia has prompted cross-border remittance companies to suspend their operations in Russia, and the US dollar is moving higher and higher, with investors building an appetite for US treasuries and preferring a defensive USD position.

Citibank expects the euro to be constrained by an ongoing energy crisis that led to surging gas prices amidst strong demand and limited supplies from Russia and other sources. Energy prices are expected to remain volatile in Europe during wintertime.

Economic Conditions

Important economic indicators of a country such as Gross Domestic Product (GDP), Consumer Price Index (CPI), Purchasing Managers' Index (PMI), the balance of payment, employment rates, job creation, etc., are fundamental determinants of a currency's health. The currency values indicate a country's underlying economy.

The CPI measures inflation, and the GDP measures the size of the economy. The PMI is a good indicator of economic activity. PMI survey data is important in formulating monetary policy by the central banks.

The balance of payment is also an important economic report. It shows how much money is flowing into the country and how much is flowing out from the country to the rest of the world.

The above-mentioned economic factors are some of the important ones that impact the EUR/USD pair.

Forex Trading Sessions

The Foreign exchange market is open 24 hours a day. It is divided into three market sessions: Asian sessions, European sessions, and North American sessions, which are also referred to as the Tokyo, London, and New York sessions. These three cities are the major financial centers for each of the regions. 

The forex market is most active during the trading sessions as major banks, corporations, retail traders in the respective regions are operational, and thousands of speculators are online during the sessions.

The Asian session is the first market to open at 11 p.m. to 8 a.m GMT, followed by the European session from 7 a.m. to 4 p.m GMT. The North American session runs from noon to 8 p.m.

The EUR/USD are actively traded during the European or US sessions as the most important economic data, and events are released during the peak activity in both sessions.

The European session and the North American session overlaps for four hours. Trading volatility tends to be elevated when forex trading sessions overlap. For the EUR/USD pair, the European/U.S. session crossover will have the most activity.

EUR/USD Forecast

The US dollar is the most widely held currency in the world. Being the reserve currency, it is the most traded currency in the world. And the euro is the second most popular currency. The USD EUR exchange rate history can give us significant insight into the future and expectations of the EUR/USD pair for 2022.

Despite the looming threat to the global economy caused by the Covid-19 pandemic, the USD had a strong 2021. A strong recovery in the U.S. economy also contributed to its growing strength.

For 2022, the US dollar is forecast to soar against all key currencies, including the EUR and the GBP, over the longer term, preferring the USD as a safe-haven currency.

At the start of the last year, EUR/USD started at 1.23 but fell to a low of 1.12 in November. Then rebounded to 1.13 in December. The currency pair has since remained in a tight range around a pivot at 1.13.

International Nederlanden Groep (ING) and Citibank predict the US dollar will continue to gain ground against the Euro driven by the policies of the Fed. 

The Fed looks to tighten monetary policy, whereas the ECB remains dovish. The U.S. expanding economy and optimistic labor market could favorably impact a US dollar forecast. The escalating tensions in eastern Europe is also a reason to favor the USD over the Euro.

The ING EUR/USD forecast by the end of Q122 is expected to be 1.10 and drop to 1.08 in Q2 and Q3 and rise back to 1.10 by the end of 2022.

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USD vs. INR: Why Is The Indian Rupee Falling Against The US Dollar?

Indian Rupee is likely to touch 79.5 INR/1 USD in 2022.The Indian Rupee has fallen to an all-time low against the US dollar, reaching levels of 1 USD to INR 76 in the recent past. UBS strategists expect the INR to weaken to 77 per dollar by the end of the year - more than 5% weaker than current levels - and depreciate further to 79.5 per dollar by September 2022.If you are sending money to India from the US, a weaker rupee means more value for the same amount of dollars. Set up exchange rates alerts to get notified when the USD vs. INR reaches 79 rupees per dollar.India received $83 billion in remittances in 2020, according to the World Bank. India is the top recipient of remittances globally, followed by China, Mexico, and the Philippines. Despite the worrying forecast, remittances to India continue to out-perform. Compare multiple money transfer specialists before sending money from the US to India or from India to the US.The fall of INR vs. USD is driven by several factors, including weak export numbers, a drop in domestic consumption, increased energy prices, and fear of soaring inflation, among other reasons.Here are some of the major factors that have impacted the fall of the Indian Rupee against the US dollar:Rising Current Account DeficitThe Current Account Deficit refers to the net amount of a nation's imports minus the exports during a year, also known as External Balance.The Current Account Deficit is considered an important metric for gauging a country's economic health and stability. It gives you the difference between the inflow and outflow of foreign currency. A large trade deficit signals greater reliance on foreign capital inflows and further weakens the Indian rupee in the Forex market.Even as all the economies in the world are going through an economic slump, an disproportionate trade deficit will result in creating a weak rupee value against the US dollar.India's current account balance posted a surplus of $6.5 billion, which is 0.9 percent of Gross Domestic Product (GDP) in the first quarter of the financial year 2021-2022 (Q1: FY 21-22) as against a deficit of $8.1 billion, which is one percent of GDP in the fourth quarter of the financial year 2021-2022 (Q4: FY 21-22).The current account surplus was $19.1 billion, which was 3.7 percent of GDP in the previous financial year (Q1:FY20-21) for the same period, according to the Reserve Bank of India (RBI).Significantly narrower current account deficits than in the first half of the last decade, and foreign exchange reserves at historically high levels have strengthened India's external position and reduced its vulnerabilities to external shocks. However, it remains vulnerable to volatile global crude oil prices as approximately 45% of all imports are energy-related.Given that net exports are projected to drag on growth over our forecast horizon, the current account deficit is likely to remain an important factor driving INR performance relative to USD over our forecast horizon.India's current account deficit is expected to rise due to increased crude oil prices, expansionary fiscal policy, and low GDP growth.Impact Of Crude Oil Prices On USD vs. INRHistorically, the price of oil has been inversely related to the price of the U.S. dollar. The explanation for the relationship between oil prices and currencies is based on two primary factors:Crude oil contracts are in USDUSD is the most traded currency in the worldTo trade crude oil, countries around the world use barrels for units and USD in currencies. Post-Covid restrictions, as economies start their long journey to recovery, crude oil prices reached a 3-year high.For a country like India that is highly dependent on crude oil imports, it has a negative impact on the Indian rupee against all major foreign currencies, especially against the USD.When the USD is strong, you need fewer USD to buy a barrel of oil and vice-versa. India needs USD to buy crude oil, so a weaker rupee means you need more rupee to the same amount of USD and barrel of crude oil. Therefore, when the INR falls against the USD, these import costs rise.As a net importer of oil, INR has a huge impact caused by any fluctuation in USD and crude oil prices.Impact Of Interest Rates On USD vs. INRThe first question that comes to our mind is - what is the relationship between interest rates and exchange rates?Let's understand the definition of both interest rates and exchange rates before we explain how it impacts USD vs. INR.Interest is the amount a lender charges to a borrower as a portion of the loan given by the lender, usually expressed as a percentage for a particular period of time.The foreign exchange rate is the value of one currency in relation to another. The relationship is stated as Currency 1/Currency 2, such as USD/INR, where the exchange rate shows the price of the USD in relation to INR.For investors, a high-interest rate means a higher return vis--vis other currencies. To take advantage of the yield, investors will most likely move their investments* to countries with higher returns, which will increase the demand for the currency and further strengthen it vis--vis other currencies.*Investments with a forward cover to protect returns in absolute termsAmid the inflationary pressure, the Federal Reserve is looking at interest hikes as a measure. This will, in return, have an impact on all USD currency pairs, including USD/INR.Keep in mind that beyond the US, interest rate differences between India and other emerging markets beyond the US could also have additional pressure on INR.Other major factors that impact the interest rates are central banks' policies, financial system, government spending, unemployment rates, and inflation.Fiscal Deficit Impact On USD vs. INRA Fiscal Deficit is defined as a net negative in the government's income compared with its spending. A fiscal deficit is usually calculated as a percentage of GDP or total amount spent in excess of income.Current Fiscal Deficit is when the government borrows more money to fund expenses instead of collecting revenues from taxes and other sources. This leads to a decline in total tax revenue, which could impact economic growth.The Current Fiscal Deficit is considered a leading indicator of a country's creditworthiness. When there is a spike in the Current Fiscal Deficit combined with negative exports growth, it may indicate that an economy may be entering a recession, and a higher cost of borrowing is guaranteed.A deterioration of the current fiscal deficit can happen for many reasons. It might simply reflect lower tax revenues due to weak economic conditions. Alternatively, it could also mean that governments are taking advantage of low-interest rates to increase spending.To reduce the deficit, the government needs to decrease spending and increase income. 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Why Is the USD to INR Increasing Today?

The Indian rupee (INR) hit a record low against the US dollar on March 7 amid the sharp surge in global crude oil prices following Russia's invasion of Ukraine and the continued withdrawal of foreign investments (FIIs). The partially convertible rupee (restrictions on certain capital account transactions) fell to INR 75.98 for 1 USD, its weakest level ever. The previous record low of the rupee against the US dollar was 76.91 in April 2020 during the COVID-19 pandemic.What is USD to INR Exchange Rate Today?Today's USD to INR stands at 75.98 (at the time of writing).What Influences INR to USD Exchange Rate?The INR to USD exchange rate is influenced by a combination of factors. In the foreign currency market, the value of a currency is controlled by the basic economic concept of supply and demand.The exchange rate is the value of one currency in terms of another currency (for example, 1 USD to INR today is 75.54). 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There is no threshold for payment card transactions.What Additional Information May Be Required for Form 1099-K?Your third-party payment provider may request tax information such as your Employer Identification Number (EIN), Individual Tax Identification (ITIN), or Social Security Number to report payments on Form 1099-K properly. Once this information is confirmed, your tax forms can be issued without a hassle.If you cross the reporting threshold for the sale of goods and services on the payment apps, the Form 1099-K will be issued to you at the beginning of the 2023 tax period, and a copy of it will be sent to the IRS.You can also download account statements for any reporting obligations, even if payments received are within $600. 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If you receive the Form 1099-K at year-end, you can check your accounting records to see if the income reported to the IRS is accurate. Even if you don't receive Form 1099-K, the income still needs to be reported on your tax return.Go for a record-keeping system that reflects your income and expenses. Also include accounting and payroll records, bank statements, receipts, tax forms, returns, and relevant business-related financial records.Most importantly, set up a business account if you are receiving business payments through a P2P payment platform.Maintain a separate account for business and personal transactions.Having a separate business account and keeping good records can be practical when showing both taxable and nontaxable income sources if the IRS audits your income tax return.If you pay your business expenses using any of the payment platforms, get the invoice or a receipt from the vendor or the contractor to record the amount paid and the details of the business expense. This will serve as evidence for your expenses if the IRS questions the legitimacy of your business expenses.1099-K Guide: What if Multiple Payment Platforms Are Used?The IRS tax rules are the same for all the P2P platforms, including PayPal, Stripe, or Venmo, though it might be enforced differently. If you are receiving business payments from multiple platforms and the collective amounts from sales on these platforms exceed $600, consider speaking to a licensed tax professional for best practices.You can find the contact details on Form 1099-K if you have any questions on the matter.Are Transactions on Zelle Taxable?While this rule applies to most third-party payment networks, Zelle is not included. Only the P2P payment companies that deal with the settlement of funds in business transactions are required to issue 1099 forms to users. Zelle doesn't process payments but facilitates communication via messages between a financial institution and people making the payments.Zelle states that it does not report transactions made on its Network to the IRS, even if the total is more than $600. The new law to provide forms 1099K for information reporting does not apply to the Zelle Network, it added.Will I Be Taxed in the United States for Sending Money Abroad Through a Payment App?Most digital wallets or P2P payment platforms do not support international money transfers. The best way to send money from the U.S. internationally is through online money transfer companies such as Xe money transfer, Remitly, and Western Union.In general, when you send money from the United States, the first $15,000 USD, per recipient will be exempt from taxes by the IRS under the Gift Tax policy. Although sending money as a gift is not taxable, you may need to report it to the IRS. In conclusion, from the beginning of the 2022 tax year, P2P platforms will be required to send Form 1099-K to users and the IRS to report payment transactions totaling $600 or more in a financial year. While this does not have any impact on international money transfer yet, existing laws that govern cross-border transactions will be applicable including Gift Tax.

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