On Friday, the EUR/USD pair was testing the upper limit of the 1.0600-1.0660 range, and it has been trading in this range since December 23. On Thursday, bulls tried to push the pair to rise further, but in the end they still returned to their previous positions. This is just market noise, which is inherent in the New Year's quiet period. The main events in the foreign exchange market will unfold in early January.
The euro-dollar pair met 2022 at 1.1384, already being within the framework of a multi-month downtrend. Looking at the monthly chart, we can see that the downward wave originated back in July 2021: after reaching 1.2250, the pair moved down and fell by more than 2500 points, ending its marathon at 0.9537 in September 2022.
Of course, the downtrend had its own corrective pullbacks, and sometimes very impressive ones – but if we ignore the temporary upward spikes, we can conclude that the pair's downtrend in 2022 is a logical continuation of those trends that took on their clear outlines in the summer of 2021. And this cycle ended 14 months later – at the end of September 2022. It was then that the bulls of EUR/USD seized the initiative and, after a weeks-long siege, were still able to cross and settle above parity level. After that moment, events unfolded more rapidly: in October, the pair grew by more than 300 points, in November by 700 points. In December, the bulls passed almost a 300-point path, but at the same time they could not settle within the 7th figure. Actually, this target was the last test for the bulls, which they obviously did not pass. At least the bears did not allow their opponents to end the year on a positive note: over the past two weeks, the price has actually been revolving around the 1.0600 mark, reflecting how both bulls and bears are indecisive.
The leitmotifs of the EUR/USD downtrend: the European Central Bank policy lagging behind the Federal Reserve, geopolitical tensions, and the energy crisis in Europe. If we correlate the dynamics of the development of these fundamental factors with the pair's chart, then the relationship is obvious. And in 2023, these factors will also affect the pair.
According to many currency strategists, the ECB had a late response to the increase in inflation in the eurozone (which then had to resort to 75-point rate hikes). The slowness and "sluggishness" of the ECB has weighed on the euro for many months. It is worth noting that the Fed also did not immediately respond to inflationary challenges, but then the US central bank implemented the fastest policy tightening in recent decades. This factor has become the main locomotive that supported the dollar this year, due to the increased appeal of carry trades. Geopolitical tensions, in turn, have become an additional "bonus", increasing the demand for a safe greenback.
It is also worth noting that for several months of 2022, the EUR/USD pair was under the strongest pressure due to the energy crisis. The notorious "gas issue" has become a headache for the Europeans, the ECB and, accordingly, the euro. The most difficult situation was at the end of summer – for example, on August 26, gas cost more than 340 euros/MWh (that is, more than $3,500 per thousand cubic meters at the exchange rate of that day). Such a rapid uptrend on the eve of the autumn-winter period frightened traders, since along with the price of gas, the risks of stagflation in the European region also grew (the ECB would have acted much more cautiously in this case than the Fed).
To date, all of the aforementioned fundamental factors have not disappeared, but, so to speak, "transformed". By the end of the year, the Fed slowed down the pace of rate hikes, while the ECB continued to show fighting spirit, declaring that it will maintain its hawkish course. And although the ECB has also slowed the pace of monetary policy tightening to 50 points, the central bank has made it clear that it is ready to raise rates at such a pace until it curbs inflation. The Fed, in turn, tied the pace of tightening of the monetary policy and (most importantly) the final point of the current cycle to the dynamics of the growth of inflation indicators. As we know, the consumer price index in the US, as well as the basic PCE index, have been declining for the past two months. By the way, amid such trends in the market, there are more and more suggestions that the Fed may lower interest rates in the second half of the year, given the prospect of a recession and a sharp decline in inflation.
The gas issue eased its pressure on the pair at the end of autumn. In early November, we found out that the gas storage facilities in Germany were filled by more than 99%. The current situation has attracted huge volumes of LNG to Europe, and, according to reports, this flow is not weakening. For example, the week before last, a record 50 LNG tankers were unloaded in Europe (the volume of deliveries amounted to a record 4.4 billion cubic meters). Last week, another 49 tankers unloaded almost the same amount of LNG. As a result, the price of natural gas at the TTF hub in the Netherlands, the largest in Europe, fell below 77 euros per megawatt-hour during trading on December 27 (which corresponds to 820 euros per thousand cubic meters). This is the lowest figure in the last 10 months. According to the German ministry, the warm weather that set in late December and reduced consumption also contributed to the reduction in gas prices. In addition, the arrival of more energy from wind farms also played a role.
Thus, summing up 2022, we can come to the obvious conclusion that at the end of the year the euro managed to show that it has the ability to deal with difficult situations and recover some of the lost positions. A relatively small part: by all appearances, the EUR/USD pair will finish the year in the area of the 6th figure, while it started from the 1.1350 mark. But nevertheless, the fundamental background for the time being favors the further strengthening of the single currency. If the Fed doesn't surprise traders with a hawkish attitude in the beginning of 2023 (corresponding hints were made by the head of Fed of New York John Williams), bulls will attack. The main bullish target is at 1.1000, which is a psychologically important level, which corresponds to the middle line of the Bollinger Bands indicator on the D1 timeframe.
