This bearish move ultimately amounted to a drop of over 1800 basis points. However, the fourth quarter of the year saw a dramatic turnaround, with the EUR/USD reaching a high of 1.0737 on December 15, reversing over two-thirds of the previous 9-month decline in just six weeks.
November alone saw the EUR/USD gain 10%, its best monthly performance since July 2020.
Factors impacting the EUR/USD in 2022
Several factors contributed to the EUR/USD's performance in 2022. The strength of the dollar, fueled by the rapid rise in rates from the Federal Reserve, weighed heavily on the EUR/USD pair.
Additionally, the European economy was more affected by the war in Ukraine and the resulting energy crisis than the US economy, giving the dollar an additional advantage. However, the context has changed in the fourth quarter of the year, with the slowdown in the Fed's rate hike schedule and moderation of inflation in the US leading investors to reconsider the pair.
The Role of Central Bank Policy in 2023
Next year, the key question for the EUR/USD will be whether the Federal Reserve or the European Central Bank will be the first to lower rates again. UniCredit Forex strategist Roberto Mialich believes that the Fed is likely to cut rates in 2024 at a faster pace than the ECB, leading to a narrowing of the differential between the US Fed funds rate and the ECB depo rate and a higher EUR-USD exchange rate.
However, both central banks' monetary policies will depend on economic developments, including inflation and the impact of higher rates on growth. A sharp recession or a resolution to the conflict in Ukraine could also impact rate expectations.
Technical Analysis of the EUR/USD in 2023
From a technical analysis perspective, the EUR/USD's rise could be supported by a bullish "golden cross" signal, where the 50-day moving average crosses above the 200-day moving average. This signal has accurately predicted past trend reversals and could signal further upward movement for the EUR/USD in 2023.
Additionally, the EUR/USD's recent break above a downward trend line and strong momentum could indicate a longer-term bullish trend. However, traders should also be aware of potential resistance levels and bearish reversal patterns.
Conclusion and Outlook for the EUR/USD in 2023
Overall, the EUR/USD's performance in 2023 will depend on a range of factors, including central bank policy, economic developments, and technical analysis. While the pair has made a strong bullish reversal in the fourth quarter of 2022, it is important for traders to carefully consider all of these factors before making any investment decisions.
