Earlier this week, the EUR/USD exchange rate traded at the highest level since early October, and has been on the rise since late last month. The pair has risen over the past month by close to five percent. The main driver of the exchange rate’s rise has been the prospect of a slowdown in US interest rate hikes, which have been pushed by the Federal Reserve’s aggressive monetary policy. In contrast, the ECB has been boosting its commitment to hiking interest rates.
On Monday, the pair briefly dipped below the $1.00 mark, but rebounded to close near a five-month high. The currency pair has now reclaimed its parity with the dollar, after hitting the lowest level in 20 years on 5 September. However, the currency is still under pressure, with a deteriorating economic outlook for the region, as well as governance and governance-related risks.
The ECB has signaled that it will continue raising interest rates, despite the fact that inflation in the eurozone has not yet peaked. It may ease up on its hawkish rhetoric and carry its rate hike cycle into the next year, but inflation is expected to remain above the 2% target level until at least 2025.
Meanwhile, inflation in the UK matched a 40-year high in September. The pound sterling’s fall was accentuated by higher food and energy prices, which helped push the country’s overall inflation to 10.1%. However, the rate remained well below the ECB’s 2% target level.
On Tuesday, the euro to US dollar exchange rate jumped after the ECB raised its interest rate to 1.25%. It is now expected that the central bank will raise rates another 25bps next month, with a 50bps hike expected in December.
The euro was also hit by news that Russia has shut down its main gas pipeline to the European Union, raising fresh risks of a gas cutoff. The halt is a blow to Europe’s economic outlook, as it leaves the continent exposed to a further deterioration in energy supply. The country has been threatening to permanently shut down the pipeline, which would leave Germany and other European countries in the cold for much of the coming winter. This has been a major blow to the economy, and has left many investors jittery about the economy’s long-term prospects.
The euro to US dollar exchange rate has risen by close to five percent in the past month, driven by a weaker dollar. However, investors continue to bet that the Fed will not hike interest rates as aggressively next month. In addition, the euro to US dollar exchange rate has risen on moderately improved economic sentiment in the eurozone. This is a sign that the ECB’s rate hikes are starting to have a noticeable impact on the currency pair.
The euro to US dollar exchange rate soared over the past week, following the ECB’s interest rate hike on 16 September. The pair briefly fell below the $1.00 mark, but rebounded in the afternoon. However, the currency pair is still trading below its 200-day moving average, and could struggle to sustain an advance. It is possible that the euro will return to parity with the dollar in the short-term, but it is likely that it will remain under pressure.