USD to EUR Forecast

History of the USD to EUR

Europe and the United States always had close economic and social ties which were done using the US dollar and local currencies for a long time. Germany had Deutsche Mark while France had the franc and Italy had the lira, all these changed on January 1999 when the European Union introduced using a common currency known as the euro.

The euro currency was then officially launched on January 1, 2002. 20 of the 27 EU member countries use the euro.

In most cases, the USD and euro exchange rate is identified as per the ISO standard- EUR/USD. Over the years, the performance of the pair has favored the US dollar because of the overall strength of the American economy and the fact that the dollar is the reserve currency of the world. In 2022, the EUR/USD price crashed below the parity level for the first time in two decades.

The USD to EUR is the most liquid currency pair internationally because of the volume of trade between the US and Europe. Euro is often seen as a safe currency, which makes it the second-biggest reserve currency in the world. As shown below, the USD to EUR price has generally been in a strong bullish trend since the 2008/9 financial crisis.

Latest USD to EUR forecast

The USD to EUR was characterized by the spectacular euro sell-off as the European Union got highly exposed to Russia’s invasion of Ukraine. Russia stopped natural gas flows to the region and ordered all gas payments to be handled using the Russian ruble. As a result, Europe’s inflation surged to double-digits while manufacturing activity slumped.

The USD/EUR also surged because of the extremely hawkish tone of the Federal Reserve, which hiked rates by over 400 basis points in 2022. Historically, a hawkish Fed is usually bullish for the US dollar.

The greenback also surged because of the rising geopolitical tensions, which pushed investors to the USD because of its role as a safe haven.

The USD to EUR suffered a major reversal in September when it became clear that the Fed was winning its battle against inflation.

After peaking at 9.1%, the headline consumer price index (CPI) dropped to about 6.1% in December. As a result, the Fed downshifted its hikes in December when it hiked by 0.50%, and in February when it raised by 0.25%.

Therefore, some analysts believe that the Fed will start lowering rates in Q4 of 2023 or in Q1 of 2021 if the situation moves into deflation.

Meanwhile, in Europe, the European Central Bank (ECB) hiked rates by 0.50% in February as its battle against inflation continued. The hike was necessary since Europe’s economy has done better than expected, with natural gas prices crashing. The EU narrowly avoided a recession in Q4’22, helped by resurgent Ireland.

ECB and Fed hikes ahead

The Fed is expected to stop hiking interest rates in May this year and then leave them unchanged for a while. This strategic pause will be necessary to prevent a severe recession in the country. Expectations are that the terminal rate will be 5.5%.

In its decision in February, the ECB decided to hike the interest rates by 0.50%, bringing the key rate to 2.5%. It also hinted that there will be more rates to come since inflation remains substantially high in Europe. In January, consumer prices dropped to 8.5%, which is still above the ECB’s target of 2.0%.

Technical analysis

Technical analysis is the study of charts to predict the future price of an asset. On the 1D chart, we see that the USD/EUR pair has been in a strong downward trend starting September last year. The 50-day and 200-day exponential moving averages have made a bearish crossover pattern.

In most cases, this tends to be a sign that the downward trend will continue.

The pair has dropped below the 50% Fibonacci Retracement point and formed a descending channel. Therefore, the USD to EUR price will likely continue falling, with the next reference level being at 0.8620.

Transferring USD to EUR

Trillions of US dollars are sent to Europe every year and vice versa because the US and the European Union have one of the closest trade relationships globally.

According to the US Trade Representative, the total trade volume between the US and the EU was valued at over $1.1 trillion in 2019. The US imported goods worth over $598 billion and exported $468 billion. As a result, the US had a trade deficit of $130 billion in 2019. At the same time, US services exports were $200 billion and imports were $146 billion.

Further, American firms have made significant investments in the EU, which is the second-biggest economy globally and European firms like LVMH and BMW have made vast investments in the US. Additionally, countries from both sides hire many remote staff.

Thus, the need for transferring USD to EUR and EUR to USD is ever-rising. In fact, most companies that dominate the industry like Wise, WorldRemit, and PaySend are from the two regions. The cost of sending the currencies is also much lower because of the thin spreads.

Is it a good time to buy USD with EUR?

It is easy to convert the USD to EUR and vice versa these days. The USD to EUR exchange rate has dropped from the 2022 high of 1.0485 to a low of 0.9072, which is a ~13% drop. This decline means that the US dollar (base currency) has weakened against the euro (the quote currency).

In other words, it has become cheaper to buy USD with euros.

In our estimation, we believe that the USD will continue to ease in the next few months if inflation will continue falling. Therefore, the USD will likely get cheaper over time and you can use the dollar cost averaging (DCA) strategy and buy USD with euro in smaller amounts. You will be benefited once a reversal happens.

USD to EUR 6 month forecast - next 6 months analysis

The performance of the USD to EUR in the next 6 months will mostly depend on the actions of the ECB and the Fed and recession risks around the world. If these risks rise, it could mean that inflation will decline, which will result in turning the banks a bit dovish. Since the Fed has more influence than the ECB, a pivot will mean that the USD weakness will persist for some time.

Therefore, trends in inflation will have an impact on the pair. The chart below shows that inflation expectations have been dropping in the past few months.

Meanwhile, the US is facing the debt ceiling crisis, where Republicans in the House of Representatives are opposing Biden’s budget proposals.

They insist that to increase the debt ceiling, they need to see meaningful spending cuts. As a result, the government could run out of money by June. Before that, credit rating agencies like Moody’s and S&P will downgrade the US government as they did in 2022, which will hit the USD.

Using Fibonacci Retracement on the daily chart, the likely level to watch will be the 78.6% point at 0.8620, which is ~7% below the current level.

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