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.
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.
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.
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 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.
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.
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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