Eur/usd: Why the euro could wait a long time to rise against the dollar?

Eur/usd: For the first time since mid-September, the euro rises above parity with the dollar

(BFM Bourse) – The single currency rose above parity with the dollar on Wednesday for the first time since mid-September. The euro benefits from a depreciation of the dollar and the prospect of a rate hike by the European Central Bank. A temporary reduction in energy concerns would also explain this move.

The euro regains color against the dollar. The single currency rose above parity against the dollar on Wednesday for the first time since mid-September, taking advantage of an episode of dollar weakness and a possible further tightening by the ECB.

The pound, meanwhile, continued to recover, reassuring the markets the new prime minister, Rishi Sunak, after the debacle of the short-lived government of Liz Truss, which had taken the British currency to record lows.

A temporary reduction in energy concerns

The euro gained 0.43% to $1.0005 around 3pm, benefiting from “a temporary easing in energy concerns and expectations of a rate hike next year in Europe following the new strong contraction of economic indicators”. The activity PMI published on Monday, explains Guillaume Dejean, of Western Union.

According to this index that serves as a barometer of the economy, the fall in economic activity in the euro zone accelerated sharply in October in the private sector, increasing fears of a recession.

Investors therefore expect the European Central Bank (ECB) to hit hard by raising its interest rates again by 0.75 points, which should support the single currency. The European Monetary Institute had already raised its reference rates twice since the summer, 0.50 points in July and 0.75 points in September.

And while the euro zone is “unlikely to avoid a recession,” mild weather and a “significant drop in energy prices, especially gas, could bring some relief” in the short term, says Thu Lan Nguyen of Commerzbank.

However, the analyst warns: “it is still too early to expect a lasting change” in relation to the energy crisis in Europe that has eroded the purchasing power of consumers in recent months.

Fall of the dollar after degraded statistics in the United States

The euro also benefited greatly from the dollar’s decline, following a series of unfavorable economic indicators. The dollar “fell to its lowest level in three weeks on signs of an economic slowdown in the United States and expectations of a less drastic hike” from the Federal Reserve, says Victoria Scholar, an analyst at Interactive Investor.

Consumer confidence, for example, deteriorated more than expected in the United States in October, according to the Conference Board index published on Tuesday, due to persistent inflation and the prospect of a recession.

The dollar could suffer a rate hike less aggressive than expected by the Federal Reserve (Fed). “But nothing official indicates at the moment a possible softening of the Fed’s tone,” moderates Ipek Ozkardeskaya, an analyst at Swissquote.

A revamped form of the British pound

Sterling also benefited for the time being from dollar weakness, returning to a level most seen since mid-September against the greenback, before former Prime Minister Liz Truss’s ill-fated ‘mini-budget’. These measures had caused the currency to plummet to its all-time low. The pound added 0.78% to $1.1561, after rising as high as $1.1620.

The British currency had started the week on a positive note, then soared on Tuesday, gaining almost 2% against the dollar, taking advantage of both the falling dollar and the inauguration of the new British Prime Minister Rishi Sunak, well received by the investors.

“There is no doubt that Rishi Sunak’s arrival as prime minister has helped allay fears of unwise fiscal policy,” said Markets.com’s Neil Wilson.

(with AFP)

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