The euro continued to maintain its exchange rate recovery ahead of the turn of the year. At the start of Thursday's European session (29/December), EUR/USD still occupied the highest range since.
It was especially for June and EUR/GBP inhabited the highest range since October. Two factors are the main supporters of the current euro exchange rate.
Those factors are the decline in European gas prices and the more hawkish decision of the ECB. Benchmark European gas prices fell by 30 percent last week and continue to come under pressure in this week's trade.
The reason is that Russia expressed readiness to resume gas supplies to Europe through the Yamal line again. Demand projections also weakened.
EUR Outlook Is Neutral
The situation above happened as the weather forecast circulated which suggests northern Europe will experience above-average temperatures in early January 2023.
The decline in European gas prices is supporting the recovery of the region's economic activity. That is although there are still many problems that could resurface in the future.
At the same time, the various projections surrounding the recession are fully understood by market participants and are no longer horrendous news. The EUR outlook is neutral-to-somewhat-constructive.
The scourge of recession in the Euro Area, energy issues, geopolitical concerns remain. If the situation worsens, then the forecast needs to be revised down.
ECB may Scrape the Euro Exchange
However, for now, The analysts believe most of the risks are already factored into the price. That was said by Christopher Wong, analyst at OCBC Bank.
The ECB's hawkish rhetoric also prevents the EU-UST yield gap from worsening and should continue to provide some support for the EUR. A recent ING Bank research report revealed.
It could be seen that its analysts signaled the ECB wanted to scrape the euro exchange rate next year. The reason is that a stronger euro exchange rate can help suppress the rate of inflation.
The ECB clearly wants a stronger euro to help it in the fight against inflation. That appeared at the press conference last week that President Christine Lagarde wanted to highlight that the ECB will tighten longer than the Fed.
The opinion above was said by ING's Chris Turner. If the ECB succeeds in pushing the euro higher, then the euro will really rally against the high-weight currencies in the Euro Index.
DXY Continues It’s Consolidated Support
The largest weight in this Index is the US dollar (16%). After that, it was followed by the Chinese renminbi (14%), and then the British pound (12%) based on the released data.
The US dollar index or it is known as DXY continued to consolidate support above the 104.00s in yesterday's trading (29/December). The greenback was briefly pressured by the improvement in market sentiment.
It was especially at the beginning of the week due to the easing of China's quarantine rules. However, the news has now increased the anxiety of market participants and supported the demand for safe haven assets.
The example is US dollar. The Chinese government on Monday announced an easing of quarantine rules for tourists as well as a series of other social restrictions.
Increasing COVID-19 Cases Affect the Market
Several countries immediately responded to the announcement by imposing new COVID testing rules for migrants from China, including the United States and Japan. Italy is mandating similar tests.
Those tests come together as well as urging that the European Union implement them as well. The surge in the number of COVID cases in various countries has again sparked concerns.
Worldometer data shows Japan is experiencing an increase in new cases and the highest death toll in the daily base. Then it was followed by South Korea in second place, Taiwan and China in third and fourth place.
However, many doubt the credibility of the data reported by the Chinese government. This is what prompted many countries to require migrants from China to pass the COVID test.
