Euro US Dollar (EUR/USD) Exchange Rate Firms Despite Technical Recession

The Euro US Dollar (EUR/USD) exchange rate is strengthening modestly this morning despite a contraction in Germany’s economy. The unexpected fall in Europe’s largest economy could mean a recession is more likely in 2023.

At time of writing, the EUR/USD exchange rate is around $1.0910, a 0.39% jump from this morning’s opening levels.

Euro (EUR) Firms Despite Contracting German Economy

The Euro (EUR) exchange rate is enjoying moderate success against most of its rivals this morning despite a surprise contraction in QoQ growth in Europe’s largest economy.

As markets expected a 0% change, the economy unexpectedly contracted by 0.2%. With the effect of the Ukraine conflict weighing heavily, economists had predicted a recession in 2023. However, with the latest sign that the economy shrunk once more, and Q1 2023 is also expected to shrink, the Euro could come under pressure once more.

Year on year growth also underwhelmed and printed lower than expected. Against an expected 1.3% growth YoY, Germany’s economy only grew 1.1%. The data, published by Destatis, released a statement commenting on the latest figures:

‘After the German economy managed to perform well despite difficult conditions in the first three quarters, economic performance slightly decreased in the fourth quarter of 2022.

‘Especially the price, seasonally and calendar adjusted private consumption expenditure, which had supported the German economy in the first three quarters, was lower than in the previous quarter.’

US Dollar (USD) Quiet as Investors Brace for Rate Decision

Meanwhile, the US Dollar is struggling for demand this morning as investors have retreated to the sidelines ahead of the central bank policy decisions this week. However, with the Federal Reserve expected to opt for a dovish 25bps rate hike, before pausing altogether, could be keeping a lid on the ‘Greenback’.

With inflation cooling, and price pressures finally starting to ease, the wider markets might well be cheering such news, USD investors won’t be as thrilled. Analysts at Rabobank are expecting the Fed to slow down its hiking cycle, adding:

‘We continue to think that based on the fading momentum of inflation, the Federal Open Market Committee (FOMC) is likely to stop at a 4.75-5.00% target range and pause for the remainder of the year.’

Euro US Dollar Exchange Rate Forecast: Policy Divergence to Bolster the Euro?

Looking ahead, the Euro US Dollar exchange rate could see further movement with both the ECB and Fed releasing their interest rate decisions. A 50bps rate hike from the ECB could boost the Euro, whereas a dovish 25bps rate hike from the Fed could pressure the USD further.

An expected divergence between the two central banks could bolster the Euro. With a hawkish ECB and a Fed willing to pause the rate cycle, the divergence could see the Euro climb higher. Beyond the interest rate decisions themselves, the accompanying statements and forward monetary guidance could dictate movement going forward.