Monthly Wrap: EUR – Euro hits multi-month highs on ECB’s hawkish rate hike

Key takeaways:

• ECB’s hawkish forward guidance boosts the euro
• US dollar weakness adds to EUR’s upside
• EUR monthly lows: £0.85, $1.02, AU$1.52, NZ$1.63, C$1.37
• EUR monthly highs: £0.87, $1.07, AU$1.59, NZ$1.68, C$1.45

The euro struggled to find a clear direction through the last week of November. Worries that Russia would cut gas supplies to Europe via Ukraine raised energy security fears, while the European Central Bank’s (ECB) meeting minutes added to the pressure.

As December began, poor Eurozone data compounded the common currency’s woes. However, EUR’s negative trading relationship with a weaker US dollar supported the euro, lifting it against its weaker peers.

Subsequent data releases began to improve. Industrial data from Germany – Europe’s largest economy – exceeded forecasts, as did the Eurozone’s final GDP reading for the third quarter of 2022. Russia-Ukraine worries, however, continued to limit gains.

The ECB decision in mid-December then gave the euro a significant boost. The bank raised interest rates by 50bps, as expected, but gave a clear signal that more steep rate rises are on the way.

In its monetary policy statement, the ECB said that policymakers believe ‘that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive’.

This hawkish rhetoric saw markets price in more interest rate rises from the ECB, even as other central banks around the world look to slow their pace of policy tightening. As a result, the euro leapt higher.

The remainder of December could see thin trading conditions as markets wind down for Christmas and New Year’s Eve. While economic data is lacking, any news around the Russia-Ukraine war could impact EUR exchange rates.

Some analysts believe that the Kremlin is planning a renewed offensive early next year. Any hints of such a development in January could weigh heavily on the common currency.

Data-wise, the first week of 2023 brings the Eurozone’s flash inflation rate for December. Another cooldown could indicate that inflation has peaked, which may weigh on ECB rate rise bets and thereby dent EUR.