EUR/USD 2023 forecast, as per forex strategists

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By Senad Karaahmetovic

AiVIF.com -- EUR/USD price has had a strong couple of months. The major hit a 20-year low in September 2022 when it traded in the low 0.95s. EUR/USD has hit a major resistance line in recent days, signaling a pullback may be occurring soon. 

As of January 16, 09:05 ET (14:05) GMT, EUR/USD trades at 1.0816.

Here we look at the EUR/USD forecast for 2023, including comments from highly-rated FX strategists. 

Strong rally to end 2022

Increasing bets that the Fed will slow down the pace of rate hikes has yielded a strong rebound with EUR/USD price rallying over 14% since September. 

The strong end to 2022 has also paved the way for outperformance in the first two weeks of this year. The problem for EUR/USD bulls is that the zone around $1.09 offers a very strong resistance, in the context of an ascending trend line connecting two major lows (January 2017 and March 2020).

Given how strong it acted as support on the way down, analysts expect this area to pose strong resistance to EUR/USD bulls as they attempt to recoup all losses from 2022. EUR/USD opened in 2022 just below the 1.14 handle.

Morgan Stanley raises EUR/USD 2023 forecast

Morgan Stanley FX strategists slashed their 2023 year-end forecast for the USD. They now see the dollar index finishing the year at 98 with the greenback especially struggling against the euro.

"Global growth is showing signs of buoyancy, macro and inflation uncertainty are waning and the USD is rapidly losing its carry advantage," FX strategists wrote in a note.

Morgan Stanley's new forecast sees EUR/USD at 1.15 by year-end, a substantial revision to their previous forecast of 1.08.

Elsewhere, Morgan Stanley FX strategists also expect the British pound to record negative returns for 2023, citing domestic growth challenges. 

"Within emerging markets, we see an approximately 5% total return until the end of the year... Outperformers include those that will likely be sensitive to a recovery in the Chinese economy, including those currencies which were underperformers in 2022 such as the Chilean peso," strategists wrote in a note, according to Reuters.

Bank of America sees a stronger EUR in 2023

Bank of America FX strategists told the firm’s clients in a recent note that they expect the EUR to strengthen against the dollar in 2023. 

“We expect EURUSD to strengthen to 1.10 by end-2022 and to 1.15 in 2024, towards its long-term equilibrium, but with many risks. EURUSD has already moved to the consensus end-2023 forecast and very close to ours. The periphery remains a concern for the EUR, as the ECB has now turned hawkish. Energy prices could increase again. The war in Ukraine remains a known unknown. China’s reopening is proving challenging,” the strategists wrote to clients.

From the valuation standpoint, the EUR is “undervalued,” the strategists added. While the recent run-up in EUR/USD price has made the picture more balanced i.e. EUR/USD not “excessively” undervalued, the BofA FX strategists see EUR start moving towards its equilibrium this year.

“EUR positioning is long, the longest in G10, and longer than a year ago, but we do not find it stretched. Both Hedge Funds and Real Money are long EUR, but their flows have recently diverged. Following the recent USD selling, we think the latest FX positioning would more easily support a near-term EURUSD correction lower, as per our forecast,” the strategists added.

They also highlighted 1.09 as an “inflection point” for EUR/USD.

“By reaching the 1.09s euro will be backtesting this line with potential for it to be again serve as a pivot point for a correction lower. Possibly a correction to 1.05 before any further strength can occur such as to each markets 200wk SMA’s in the 1.12s and 97s.”

EUR/USD undervalued at current levels - ING

EUR/USD should continue moving higher in 2023, according to ING FX strategists. They see a “more benign environment” that could pave the way for the pair to trade “substantially higher” in 2023 and 2024.

ING’s mid-term fair value sees EUR/USD at around 1.15.

“The EUR/USD fair value has spiked. At the current 1.08 level, we estimate that EUR/USD is approximately 7-8% undervalued in real terms,” they wrote in a blog post.

More precisely, the strategists believe that Q223 could especially prove to be strong for EUR/USD on expectations that the U.S. core inflation would fall sharply.

“2Q should also be the period when China re-opening trends gain a further leg higher. However, 3Q and 4Q could prove trickier for EUR/USD: the third quarter on the basis that the extension of the US debt ceiling could become a very contentious political debate around that period and be bad for the risk environment and the fourth on the basis that higher energy prices could again hit the euro,” the strategists added.

All-in-all, the new ING’s EUR/USD forecasts see the pair trading between 1.08 and 1.15 this year before extending to 1.18 in 2024.

Conclusion

More and more FX strategists are calling for the dollar to continue weakening in 2023 on expectations that the Fed will pivot from its ultra-aggressive hawkish approach. Some FX strategists, including ING, revised their EUR/USD 2023 forecast which now calls for higher levels in the pair.