Monthly Wrap: EUR – Euro upside potential knocked by rumours of ECB slowdown

Key takeaways:

• Mixed messages from the ECB cause volatility
• Russia worries and positive data add to unclear movement
• EUR monthly lows: £0.87, $1.04, AU$1.53, NZ$1.66, C$1.42
• EUR monthly highs: £0.88, $1.09, AU$1.58, NZ$1.70, C$1.46

The euro found some success in the last week of December, although the lull of activity over the Christmas period led to limited movement.

Then through the first week of 2023, the euro faced significant selling pressure. The Eurozone’s flash CPI missed forecasts, dampening European Central Bank (ECB) interest rate rise bets.

Despite the sharp cooldown in Eurozone inflation, ECB policymakers signalled multiple 50bps rate hikes ahead. These hawkish comments, along with positive economic data, helped EUR.

The single currency then slumped amid reports that the ECB was considering a slower pace of monetary tightening after its February meeting. Nevertheless, ECB policymakers maintained their hawkish rhetoric, which helped the euro recoup some losses, although EUR bulls were still a little skittish.

All the while, a steady decline in the US dollar provided support for the euro, due to the currencies’ negative correlation. However, an upbeat market mood saw the safer euro struggle against its riskier peers, and Russia-Ukraine worries added to the pressure on EUR.

Coming up, we have some high-impact economic data as we move into February.

Firstly, the Eurozone’s flash GDP growth rate for the fourth quarter of 2022 is due out. At the time of writing, economists are forecasting a 0.4% contraction, which could weigh heavily on EUR. But recent data has lifted hopes of a more resilient Eurozone economy, so surprisingly positive results may boost the euro.

We then have the flash inflation rate for January, immediately followed by the ECB rate decision. A continued cooldown in inflation may hurt the single currency, while any signs that the bank is considering a slower pace of tightening could trigger an EUR selloff.

As February unfolds, positive Eurozone data could lift the euro. Forecasters expect the bloc’s economy to show signs of improving. However, any escalations in the Russia-Ukraine war could cause significant headwinds. Some analysts expect a renewed Russian offensive that may coincide with the first anniversary of the initial invasion in February 2022.