EURUSD halted a steep decline in 2022, which saw the exchange rate trade under parity.
The European Central Bank finally moved ahead with interest rate hikes and quantitative tightening plans, and the pair rallied to 1.06.
EURUSD – Monthly Chart
The monthly chart on EURUSD shows resistance at the 1.10611 level, supported in 2020. This could actually be a barrier for a January drop. Still, traders should note the 1.06 level as being essential. We also have 2017 support at 1.0350, which supports a slight pullback. A move below that can target the parity level again.
The year in the EURUSD was summarised by an aggressive Federal Reserve, which raised interest rates sharply to 4.25%. The ECB sat on their hands for over a year but finally kicked into gear around September as German inflation soared above 10%. That coincided with the Fed saying they would slow the rate hikes.
Fed Chair, Jerome Powell, did prop up the dollar by saying that rates would be “higher for longer,” and that ended market hope for a pivot.
However, ECB voting member Klaas Knot signalled that the Fed is near the end of its tightening cycle while the ECB has more to do. With five policy meetings between now and July 2023, Knot said that the central bank had “quite a decent pace of tightening” ahead.
“The risk of us doing too little is still the bigger risk,” Knot told the UK’s Financial Times. “We are just at the beginning of the second half.”
So, the theme for 2023 is for an ECB tightening cycle to catch up to the Fed. However, macro fears could hurt the Eurozone with a potential recession and a Russian ban on oil exports. The year-end closing is important in the EURUSD around the 1.06 level, which will be critical for the pair’s future.
