In the last full week of January 2022, the Euro appears to have decisively lost against the US Dollar. EUR/USD fell at one point to the region of 1.1120, its lowest level since the summer of 2020. For the week, the euro's decline was more than 1.5 percent.
One of the factors that may have supported the depreciation of the common currency may have been the hawkish tone of the Federal Reserve chairman's statements in the middle of the week. During Jerome Powell's press conference (26 January), the EUR/USD exchange rate declined towards 1.1250, and then seemed to continue the earlier initiated movement towards lower levels. The Federal Reserve's attitude and market expectations of five US interest rate hikes in 2022 may have helped the dollar, but it is also worth looking at what is happening in the Eurozone's largest economy.
The German economy contracted by 0.7 percent on a quarterly basis in the last three months of 2021, which appears to be a worse reading than market forecasts of a 0.3 percent decline. The decline in GDP was expected to come through tighter restrictions to slow the spread of the coronavirus, which in turn may have negatively affected household spending and investment, while public spending increased. According to preliminary estimates, this is the first decline in GDP in three quarters. For all of 2021, the German economy grew at a rate of 2.8 percent. However, the government in Berlin lowered its growth forecast for 2022 to 3.6 percent from 4.1 percent, citing that the start of the year will remain subdued due to the coronavirus pandemic, especially in the services sector.
Additionally, the Eurozone Economic Sentiment Index fell to 112.7 in January from 113.8 in December and was well below market forecasts of 114.5. This is the lowest reading in nine months. Meanwhile, the employment expectations index fell slightly to 113.3 from 113.5 due to a deterioration in hiring plans in services and construction, while employment prospects in manufacturing reached a record high. Expectations for selling prices rose again across all sectors of the economy and among consumers. However, the economic uncertainty index fell to 17.9 from 18.1 points.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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