The euro has been moderately rising against the US dollar this week, recovering after its collapse to the lowest levels in May 2020. Market participants suggest waiting until the EUR/USD pair retests the psychological resistance of 1.1000 and then short-selling the pair with the target of 1.0500.
Local interest in the euro can be associated with fairly positive macroeconomic reports in the euro area. According to data released this week, the currency bloc's economy expanded by 0.3% in Q4 2021 and by 4.6% year-on-year.
Positive growth was also recorded in Germany's manufacturing sector, contributing much more to GDP than most of its European peers. Industrial production in Germany rose 2.7% mom in January. In the 4th quarter, production increased by 1.5%, partially offsetting the 2.3% decrease in the 3rd quarter.
If industrial output remains unchanged in February and March, registering 3.5% growth compared to the 4th quarter, it will be the best performance in more than ten years. Despite this positive outlook, traders are in no hurry to open new positions in the euro, believing that these statistics will only provide short-term support for the currency since the data is already outdated. The overall economic situation in the EU has deteriorated significantly against the backdrop of recent events in Eastern Europe, which will be reflected in the February and March reports.
Future movements in the euro will depend entirely on developments in the global energy market. Russian Deputy Prime Minister Alexander Novak warned that global oil prices could surge to $300 per barrel if governments follow through on threats to cut energy supplies from Russia, noting that Russia knows where to redirect its oil.
In addition, Novak stressed that in response to the ban of the Nord Stream 2 gas pipeline project, Russia could impose an embargo on the Nord Stream 1 pipeline, which is now operating at 100% capacity. According to experts, if European countries are cut off from Russia’s supplies, inflation in the Eurozone will exceed 10%, plunging the region into a protracted economic recession.
Against this backdrop, the US dollar is seen in a more favorable light, given the ability of the United States to meet its energy needs through its production. In addition, the Fed is poised to raise rates at its upcoming meeting next week.
Speaking before Congress last week, Fed Chairman Jerome Powell made it clear that he supports a 0.25% increase in the interest rate. Analysts expect the Fed to hike rates by 25 bps at each of this year's remaining seven meetings. As a result, the key rate may rise to 1.5%, and the dollar will become the fastest-growing currency this year.
