Published on 17.01.2023 16:00

The Euro is entering its 3rd straight trading day stuck in a tight trading range against the US dollar which has somewhat brought the current rally to a pause and whether the uptrend can continue may depend on the world’s 2nd largest economy.

Due to the mild winter throughout Europe, energy prices including gas, have fallen significantly after a huge spike caused by the war between Ukraine and Russia and the current prices are now sitting at prewar levels.

The decline in prices was also helped by China which introduced severe lockdowns due to a new coronavirus outbreak but now the country is reopening for business and that poses the risk that gas prices may spike again and compromise sentiment on the Eurozone's recovery prospects.

"Strikingly, natural gas prices are at pre-Ukraine war levels thanks to a mild winter, implying a reduction in the euro’s energy risk premium but also skewing risks to the upside," says Themistoklis Fiotakis, Head of FX Research at Barclays.

"A renewed surge in commodity prices (incl. oil and natural gas), as Chinese demand picks up amid high geopolitical tensions. This risk underlies our near-term EURUSD forecast," he added.

There are still at least two further 50 basis point interest rates to be delivered in early 2023 in order for inflation to be brought back under control according to a survey of analysts which may mark the end of the rate hiking cycle according to European Central Bank's governing council member Mario Centeno.

The central banker, who was answering Portuguese legislators during a meeting in Lisbon, added even though inflation may have some resistance in January and February it will resume falling in March.

By bringing an end to the rate hiking program it is not yet know which further steps the ECB will take to bring inflation down further which is currently sitting to 9.2 percent, still well above the 2 percent target of the European central bank

Looking further ahead today, the main drivers of the Euro USD currency pair will be the release zew economic sediment index from Germany while in the American session market participants will await the NY Empire State Manufacturing Index from the US for the month of January.


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