Euro Against Dollar as Risk-On Sentiment Surfaces

The euro continued its upward trajectory on Thursday, peaking at around 1.0790, driven by risk-on sentiment and a slight pullback in recent days. Over the past few months, the EUR/USD exchange rate has risen more than 13%, rebounding from its bear market lows of below 0.9600 in September 2022. The euro’s rapid recovery has been influenced by a broad-based weakness in the U.S. dollar, as well as the plunge in natural gas prices in Europe.

Gas Prices in Europe Soar

Gas prices in Europe reached record highs above €300/MWh in August 2022, but have since plummeted over 85% due to lower demand and ample gas inventories. This has reduced the likelihood of an energy crisis caused by Russia’s use of fossil fuel exports as a weapon, following its invasion of Ukraine.

Despite the improved outlook for the eurozone, the region is still far from being out of the woods, with some Wall Street analysts predicting a shallow recession later this year. Weak economic performance in the coming months could limit the euro’s upward momentum, allowing the U.S. dollar to regain some ground.

However, expectations that the Fed will adopt a less hawkish stance due to falling inflation have dampened the greenback’s appeal and boosted riskier currencies. But traders may be overlooking the risks of further monetary tightening as the U.S. economy remains resilient. The strong hiring figures from January’s labor market report, with U.S. employers adding 517,000 workers, suggest that wage pressures and consumption could remain high, leading the Fed to continue raising interest rates.

Euro Traders Advised to Take Caution

While the positive trend for EUR/USD may continue, caution is advised as the probability of a reversal in price action in the near future has increased.