The EURUSD currency pair was trading up slightly during the American session after giving up some of its earlier gains. The pair had benefited significantly from the risk-on market sentiment during the Asian session when it hit a new 5-month high.
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The euro’s recovery has mainly been driven by the US dollar’s recent decline combined with easing macro conditions in the EU. However, the EU and G7 restrictions on Russian oil imports come into effect today, and investors are watching to see if there will be any changes in natural gas prices.
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Investors are particularly concerned about wage growth in the EU as real wages in Germany have fallen 5% annually this year. Moreover, since officials from the European Central Bank (ECB) expect inflation in the region to peak in H1 2023, real wages will keep falling until then as inflation erodes consumer buying power.
Hopes that China will pivot away from its zero-COVID policies following recent protests also boosted the euro, given that China remains an important trading partner for the bloc. In addition, China today eased movement restrictions in several parts of the country, which is a step in the right direction.
The markets are also looking forward to speeches from various ECB officials this week ahead of next week’s ECB Governing Council meeting, where the central bank shall announce its last rate hike for the year.
Many expect the central bank to announce a 75 basis point hike, but we must consider a 50 basis point hike. The ECB’s Gabriel Makhlouf today advocated for a 50 basis point rate hike, painting to the slowing inflation in the region.
The outlook for the eurozone is mixed for now as natural gas prices are expected to increase as colder weather sets in amid the restrictions on Russian oil and gas. However, OPEC’s decision not to increase recent production cuts could underpin lower oil prices.
The euro could keep rising if the Fed hikes rates by 50 basis points as expected and the ECB hikes by 75 basis points to fight inflation.
*This is not investment advice.
EURUSD price chart.
The EURUSD currency pair was trading up 19.8 pips (0.19%) at the time of publishing.
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