Before getting down to analyzing why Euro reminds of a mafia victim in cement shoes falling off a Chicago bridge, allow us to open it up with a meme joke that best describes this whole ordeal: “It can’t get any worse than that, right?” said 2020; “Hold my beer,” replied 2022. It appears that the COVID-19 pandemic was only a prologue to what we are going through right now. Energy and food prices are going through the roof, and inflation too. Most national currencies are getting weaker with every passing month. On top of that, the world is balancing on the edge of nuclear war that would render all these problems obsolete.
But we are not here to spread the feeling of doom and gloom but to offer a cold analysis of the dire situation that the EUR has found itself in. We intend to expose the roots of the problem and offer our EUR/USD forecasts for 2022 and 2023.
In this article, you will find the answers to the following questions:
- What’s the present situation in the EUR/USD market?
- Why did the Euro drop so much against the USD?
- What economic challenges do the EU and its central bank face right now and how are they dealing with them?
- Will EUR recover after the drop or will it keep weakening?
- What’s the forecast for EUR/USD for 2022 and 2023?
Let us point out straight away that you won’t find forecasts here that are laden with optimism and promises of a fast recovery and a bright future for us all. The first full-scale war in Europe since WWII, and the first one that has the possibility of developing into a nuclear one, the economic war, and the prospects of another war in the Asian-Pacific - all of this add a great deal of uncertainty to any foreign currency prediction, but we’ll make sure to keep this analysis objective and unbiased.
EUR/USD price analysis: revisiting the long forgotten lows
The current situation in the EUR market may be best described by the lines from the Jamiroquai song, “I’m going deeper underground; there’s too much panic in the town.” Perhaps “panic” is a bit too strong a word in these circumstances, but the ongoing developments regarding the EU's currency are indeed worrisome. The lingering energy crisis is severely impairing the national economies of the European Union and applying the constantly mounting pressure on the weakening Euro, though “plummeting” Euro would be its better characteristic in present conditions. Over the past few weeks, the price of the Eurozone currency has dropped below the parity level and reached a 20-year low.
Parity refers to the equality of price between two underlying currencies. In our case, 1 EUR is supposed to be worth 1 USD or more. The last time the Euro sank to such low price levels against the Dollar was 20 years ago, in December 2002, the period when its banknotes and coins were put into circulation for the first time. As of the time of writing, the parity level between the Euro and the US Dollar is at 0.98.
As bad as the fall below parity is, the situation looks even direr on the monthly EUR/USD chart, where the European currency disrupted the structure of the uptrend that had been building up literally throughout its entire existence, and stayed intact even during the painful economic crisis of 2008.
1-month EUR/USD chart
Here you can clearly see how EUR has broken sharply to the downside after making a recovery bounce that finalized the creation of the pattern which turned out to be the bearish flag. At that point, the price had encountered resistance slightly above the $1.2 level that overlaps with the 50% level on the Fibonacci retracement grid. This particular level usually marks the watershed moment for the price, at which point it would either catch the bullish momentum or take a turn to the downside. In our case, EUR did the latter and went straight through the 23.6% level to further confirm its bearish inclination.
At the moment, Euro is heading full steam towards the area of historic significance, the consolidation zone between $0.87 and $0.97 from which it had posted a mega rally last time around, having gone straight to the all-time high at $1.6. However, the present situation is contextually different since that price level constituted a higher low back in 2002, whereas now, we are dealing with the disintegration of an established trend. Perhaps there’s the need to explain why this has happened and how European financial authorities in the face of the European Central Bank (ECB) are dealing with the biggest financial crisis of the last decade.
The reasons why Euro has fallen so spectacularly in 2022
Reason 1: Energy crisis
The economy of the Eurozone experienced a rebound in the first quarter of 2022, which was expected after the COVID-19 pandemic had begun to subside, but then decelerated significantly due to the outbreak of the war in Ukraine that led to the rapid growth of food prices and further deterioration of the situation on the global political arena and in the energy market, causing yet another price spike of both natural gas and oil, most of which had been imported to the EU from Russia.
TTF Gas/Crude oil price charts
The IFO Business Climate Index which serves as the primary index for business confidence in Germany, the largest economy in the European Union, has also fallen dramatically over the past several months. And if we look at the global level, the S&P Global Purchasing Index has dropped to an 18-month low of around 48%. The fall below the 50% mark typically indicates the contraction of the global economy.
The level of dependence on imported oil and gas constitutes the reason why the US economy displays better resilience to the current crisis, and why the USD has gained so much against the European currency. In fact, over the past three years, the United States has become the net total exporter, meaning that the country has been exporting more fossil fuels than it was importing, whereas the EU has to deal with the consequences of its practically total dependency on imported energy resources.
Analysts from Tokyo-based Nomura Holdings forecasted that should there be any disruptions in the operations of the Nord Stream pipeline, the euro could fall to $0.9, which seems to be the case already - both the pipeline shutdown and the drop below the parity levels. In fact, the shutdown wasn't caused by an executive decision but by massive damage, and subsequent gas leaks, presumably caused by explosions, which took place on 26-29 September near the Danish island of Bornholm. The EU and Russian officials have been showering each other with accusations ever since with the latter even suggesting that it had been a sabotage mission orchestrated by the US. We won’t resort to conspiracy theories, but only point out that it’s surely a part of a total war (its economic side in this instance) that’s happening in Europe.
In the aftermath of this incident, a 12% price spike occurred amid the speculations that the pipelines would soon be beyond repair because of the rapidly spreading corrosion caused by seawater. This left the gas transmission system of Ukraine as the only viable option for natural gas delivery to Central and Western Europe - the unfinished TurkStream doesn't have the required capacity. Damage to that supply line would stop the flow of gas to Europe altogether, which is highly likely given that Ukrainian infrastructure is constantly under threat of rocket attacks.
In that light, there are discussions about gas rationing for the industry in countries like Germany that was heavily reliant on supplies of cheap gas from Russia, though such a possibility is growing slimmer. At the end of September, German Chancellor Olaf Scholz secured a deal with the United Arab Emirates and Qatar regarding the deliveries of liquified natural gas (LNG). That deal alone won't cover the pressing demand for natural gas but it comes to show that European powerhouses are actively seeking alternatives. It's likely that by the fall of 2023, the EU will reorient to other suppliers and the gas market will cool down, which will offer significant relief for the EU economy and its currency.
Reason 2: The ECB lagging behind Fed and Bank of England when battling inflation
The European Central Bank (ECB) decided to counter the outflow of investors from the EU by hiking interest rates in order to lift the currency back above parity. The latest of such raises took place on September 8. On that day, the Governing Council increased as many as three interest rates by 75 basis points. The declared goal is to tame inflation to the extent that it decreases to the bank’s medium-term target established at 2%. According to the latest assessment by Eurostat made at the end of August, the Eurozone is currently battling inflation that’s at the level of 10%
Inflation rate chart as of September 2022
Apparently, that wasn’t the last interest rate hike by the chief decision-making body of the European central bank as the projected inflation level stands to reach 8.1% by the end of the year (which has already been exceeded), and then gradually decrease to 5.5% next year before declining to the acceptable 2.3% by 2024.
However, these measures are being done much slower than the implementation of inflation policies by the Federal Reserve and the Bank of England, and the ECB began raising interest rates from a lower level. On a side note, the British economy and GBP have plunged into the national crisis due to a new and somewhat reckless monetary policy presented by the newly elected Prime Minister Liz Truss, though that topic deserves a separate article.
- The Federal Reserve raised the respective interest rates to 2.5% back from 0.5% in July;
- The Bank of England went from 0.25% to first to 1.75% and then to 2.25% with the prospect of further hikes;
- The European Central Bank, on the other hand, had to move interest rates from the negative area (-0.5%) to 1.25%, which is the highest level since 2011.
The ECB forecasts economic growth of 3.1% over the remainder of 2022, followed by a contraction to 0.9% next year, and then a modest rise to 1.9% in 2024. But if the central European bank doesn't catch up with its British and American counterparts in terms of interest rates and anti-inflation measures, more and more capital would flow out of the Eurozone and go across the Atlantic, hampering Euro's recovery above parity.
Reason 3: Low consumer confidence and recession fears
Another reason why the Euro is so fragile is the looming economic recession which is becoming a certainty with every passing week. A large number of experts claim that the recession is already underway in the Eurozone, and we agree, at least partially, with their point of view. Perhaps the only question that remains is about the severity of the said recession and the ways to confront this crisis in order to keep the European economy from collapsing.
The fear of the economic collapse has made the investors flee the eurozone in search of a safe haven for their money. This exodus caused the consumer sentiment in the EU to fall dangerously close to record lows, thus offering evidence that the economic crisis is in full swing.
The EU consumer confidence indicator
The Consumer Confidence Index (CCI) has crashed by 3.5 points to its lowest historic level at -29.9 - the index has been on record since 1985. All this points to the severity of the ongoing crisis in the EU. It means that households are refraining from making big purchases while having negative expectations about the future economic situation.
According to various macroeconomic models, the CCI will see the start of recovery in 2023, first to -29.9 in Q1 and then to -6 by year's end. It's projected to reach -4 only in 2024 which, in our opinion, is feasible only if the inflation subsides and energy prices drop to their adequate levels.
Euro price forecast for 2022 and 2023
According to our EUR/USD forecast for 2022, the European currency is highly likely to continue falling but at a slower pace - thanks to the countermeasures taken by the ECB - ultimately finding support around $0.9, with the lowest anticipated level being at $0.85. The gradual recovery is likely to begin at the end of Q1 of 2023 when it would become clear how the EU economy will have gone through the winter without Russian gas, the supplies of which had been cut off almost completely after those suspicious explosions that severely damaged Nord Stream pipelines; the situation which further exacerbated the energy crisis in Europe.
To finalize our analysis, we reckon that the likelihood of the Euro dipping below $0.85 in 2022 is low, no more than 4%. That scenario will occur only if the European Central Bank would be unable to keep the inflation at bay, and if the EU economy falters further due to possible shortages of natural gas or its rationing for the industry. As already mentioned, we predict that the Euro could experience another drop of up to 7% against the US Dollar, but will ultimately consolidate for the remainder of 2022.
The counter-inflation measures from the ECB could push Euro slightly above the parity level to approximately $1.05, but the real recovery will occur in the spring of 2023, and that is only if the war in Ukraine wouldn’t spill out to the NATO territory, or if China wouldn’t start another imperialistic venture into Taiwan that would force the EU - China’s largest trading partner - to impose sanctions or sever its economic ties with the potential aggressor.
In that case, the situation could spin out of control and result in EUR spiraling further downward. But then again, the probability of such a scenario is less than 5%. The highest (60%) probability, in our opinion, is that the Euro will find itself in a $1.05 - $1.15 channel throughout 2023 with a bullish outlook for the next three years.
The Forex market is going through tumultuous times right now amid the unfolding economic and military crises, with Europe being at its very epicenter. The war, the sanctions, the energy crisis, the soaring inflation - all these factors have had a distinctly negative effect on the Euro that has fallen to the 2002 lows and below parity with the US Dollar.
In this Euro price analysis and prediction article, we have outlined the main reasons why this currency plummeted and gave our objective forecast for the coming months. All in all, the Euro remains a too big to fail currency that fuels a $500 billion economy. Tough challenges lie ahead for the Euro and the EU, but both the economy and the currency will find the balance and get back to growth once the crises are over, which will happen sooner or later.