2023/01/15 (148.011) Technical Analysis

US Dollar Under Pressure – After Huge Rise In 2022!
Is This Year 2023 Vice Versa – A Comeback Year For The Euro?

ECB Expects Strong Wage Growth 2023

In view of the high inflation and the largely robust labor markets, ECB boss Christine Lagarde warns of rapid wage growth. At the same time, however, the central banker also expects that the expected economic slowdown will dampen this effect again in the long term. The European Central Bank (ECB) expects very strong wage growth in the euro area in the coming quarters. This reflects robust labor markets that have so far coped well with the economic slowdown, the ECB announced on Monday in a previously published article from its “Economic Bulletin”.

Higher minimum wages and a general wage catching-up process in view of the high inflation also contribute to this. Beyond the near term, however, the expected economic slowdown and related uncertainties about the economic outlook would put downward pressure on wages. Despite the recession worries, the labor market in the euro zone is holding up well. According to the statistics agency Eurostat, the unemployment rate in November remained at the previous month’s level of 6.5 percent. ECB President Christine Lagarde (67) recently pointed to strong wage growth in the euro area in an interview with the Croatian newspaper “Jutarnji list”. “We know that wages are rising, probably faster than expected, but we have to be careful that they don’t start fueling inflation,” she warned. The rapidly rising prices are eating away at real incomes. The wage demands of the trade unions had therefore risen significantly in some cases. This had fueled fears that high inflation could persist if there were persistently high wage adjustments.

Unions Under Pressure

In the article, however, the ECB warned that the economic slowdown is likely to keep wage growth contained. In the meantime, real wages have fallen significantly compared to the time before the corona pandemic. This could put the unions under pressure to demand higher wage increases in the coming collective bargaining rounds. However, the loss of purchasing power is only one factor affecting the wage demands of the trade unions. “The tense situation on the labor market and the current economic situation are also likely to play a central role,” says the report.Will The Euro Make A Comeback?

In mid-2021, the euro began to plummet, causing it to lose up to 20 percent of its value against the US dollar. However, the prospects for the euro economy are now improving again. The euro is coming back – supported by the ECB. The snapshot could have symbolic value: In the current environment, experts see good opportunities for the euro to make up for a good part of the losses it lost in the past year. The background to this is lower energy prices and fewer concerns about the economy in the euro zone. These currently make European equities and other investments on the old continent look cheap for investors.

In addition, there is the outlook for the policy of the central banks: while the US Federal Reserve could soon loosen its reins again and refrain from further sharp interest rate hikes, the ECB is likely to make significant interest rate hikes again. Most recently, ECB representatives reaffirmed their determination to raise interest rates in the fight against inflation. Interest rates still have to “rise significantly,” said Finland’s head of the central bank, Olli Rehn, for example. Higher interest rates make a currency more attractive to investors.

France’s head of the central bank, Francois Villeroy de Galhau, also expects further steps upwards. “In 2023, fresh rate hikes at a pragmatic pace will likely be needed in the coming months to bring inflation towards 2 percent,” he told the French Senate’s finance committee on Wednesday. What he specifically understands by a pragmatic pace, he did not explain. However, Villeroy made it clear that he believes interest rates have now reached a neutral level. The ECB completed the turnaround in interest rates in July 2021 and has since raised the key rates in four steps by a total of 2.50 percentage points. The current deposit rate on the financial markets, which banks receive from the central bank for parking excess funds, is now 2.00 percent. ECB President Christine Lagarde has signaled further interest rate hikes of 0.50 percentage points for the next few meetings, as last seen in December. The next rate meeting will be on February 2nd.

Dollar Under Pressure

The dollar, on the other hand, is under pressure because interest rate expectations of the US Federal Reserve are tending to decline. Recently, the US inflation rate has fallen from a high level. Leading economic indicators have also clouded over significantly. Apparently, the previous interest rate increases are already having a negative impact on economic development. According to Bloomberg, financial markets expect the ECB to hike interest rates by another 150 basis points this year. The US Federal Reserve, on the other hand, is only expected to add another 60 basis points. Against this background, analysts give the euro further chances of appreciation. Deutsche Bank, for example, like Morgan Stanley, assumes that the euro can rise to as much as $1.15. Investment house Nomura predicts a rise to $1.10 by the end of the month, reports Bloomberg. Strangely enough, the weather plays an important role in the possible turnaround on the foreign exchange market: the mild winter has caused energy prices to fall. This brightens the economic sky. The euro has suffered significant losses in 2022, slipping to parity against the dollar. Market participants are now waiting for new US inflation data, which will be released on Thursday. They are considered to be crucial for the short-term course of the US Federal Reserve. At the moment it is not entirely clear whether the Fed will slow its pace of rate hikes further at the next meeting in early February.

Euro Tops Fresh 9-Month High

The euro extended gains to approach $1.09 in the second half of January, a fresh nine-month high as bets increased for more aggressive monetary policy tightening from the ECB while markets started pricing in a downshift from the Fed. The ECB is expected to continue its aggressive campaign and raise interest rates by 50bps in both February and March with the deposit rate reaching a peak of 3.25% from the current 2%. Such bets were reinforced after Governing Council member Klaas Knot signaled at least two more 50bps rate increases and the tightening mode lasting until the summer. On the other hand, the FED which started raising borrowing costs much earlier than the ECB is expected to continue to slow down the pace of tightening this year.