For three consecutive trading sessions, the price of the EUR/USD currency pair has been moving in a downward correction, stable around the support level 1.0775, at the time of writing, ahead of important data and events affecting the markets and investor sentiment. The gains of the upward rebound for the EUR/USD pair were recently, reaching the resistance level of 1.0875. In general, the euro is supported by the decline in gas prices, but now it seems expensive against the British pound and the dollar, as analysts say.
The euro could therefore continue to rally in the near term as wholesale gas prices drop sharply, but some analysts warn that the rally is getting wider and leaves the "overvalued" euro now at risk of a rebound. The euro is considered one of the best performing currencies in 2023 as negative sentiment among investors receded after the continued decline in wholesale gas prices reduced the prospects of a recession in the eurozone in 2023.
Better economic prospects mean that the euro advanced by more than a percentage against the dollar in January - adding to December's 2.90% gain - and has returned to stability around 1.08. Low gas prices mean they are back below levels last seen before Russia's invasion of Ukraine.
According to trading, Dutch natural gas futures TTF - the European Union's wholesale gas standard - fell by more than 12% to 56 euros / MWh on Monday, the lowest level since September 2021 as more LNG shipments may head to Europe. Gas stocks in China are also forcing importers to divert February and March shipments to Europe, according to Celtic Financial Planning. Gas prices are also falling in the United Kingdom, but the pound sterling was unable to resist the advance of the euro, which means that the exchange rate of the pound against the euro fell to 1.1275.
Gas market developments have combined with the reopening of the Chinese economy (China is a major destination for Eurozone exports) and expectations of a more hawkish European Central Bank where interest rates could rise by at least another 100 basis points. Accordingly, Kenneth Brooks of Société Générale strategist says: “The less pessimistic outlook on the European economy, flows into stocks, the possibility of a narrowing of the Fed / European Central Bank interest rate differential, and an improvement in demand from China all bode well for the single European currency on medium term.” .
Euro is overvalued
An analyst from Société Générale found that the price of the euro appears to be expensive compared to the fundamentals and thus the possibility of a decline increases. But there is no sign of a major trend reversal soon, so the analyst says pullbacks are likely to be seen as a buying opportunity.
Besides, the obvious driver of the reversal in the euro's fortunes lies in the sharp rise in European energy prices, however, meteorological forecasts and LNG delivery forecasts point to another imminent “blowout” that is not imminent. Alternatively, it may be a shift in the ECB's rate hike expectations that is prompting the rebound. A new survey of economists on the future of the ECB's interest rate policy showed the consensus expects a half-point increase at the February and March meetings, followed by a 25 basis point increase in May or June.
EUR/USD forecast today:
- The bulls are trying to hold on to the resistance level of 1.0800 to control the direction of the EUR/USD currency pair, according to the performance on the daily time frame chart.
- The bouncing down recently naturally after its recent gains, with investors awaiting the announcement of inflation figures for the eurozone and a round of important US economic data.
- This is led by the producer price index and US retail sales.
- If the bears return the currency pair towards the support level of 1.0685, you will experience the last hopes for the currency pair's rise.
On the other hand, if the euro gets bullish momentum again, the EUR/USD pair may move towards the resistance levels 1.0875 and 1.0920 again. I still prefer selling the EUR/USD from every higher level.
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