US inflation versus Eurozone inflation, the divergence in monetary policy of the ECB and the Fed, and the strengthening of the US dollar will be the main factors that weaken the euro in 2022.
The euro exchange rate against the US dollar is predicted to weaken in 2022. The very hawkish monetary policy of the Federal Reserve is still the main focus, as well as the ECB's monetary policy which will steal more attention than this year, due to its relation to the development of Eurozone inflation. Forex experts at BofA Securities predict that Eurozone inflation will be the new key high impact EUR/USD in 2022.
"Whether the ECB will actually 'exit' (from loose monetary policy) or not at the end of next year, (their policy) will depend on inflation," wrote the BofA analyst team quoted by MarketWatch. "The ECB revised its inflation forecast substantially upwards, consistent with the recent inflation shock. Their (monetary policy) however remains looser than what is needed to end QE."
US Dollar Outlook Still Bright, Euro Harder To Rise
The US dollar is expected to continue to strengthen next year, so this will also weigh on the euro. In 2021 alone, the Euro is already the worst performing major versus the US Dollar. EUR/USD's total slump was 7.7% year-to-date.
The strengthening that was created after the announcement of the ECB's monetary policy in December did not last long. EUR/USD is again sluggish after the ECB said it would continue to apply accommodative policies despite reducing bond purchases for stimulus during the pandemic.
"We now expect an extended period of US dollar strength and even predict it will extend to the end of 2023. (This is getting longer) compared to our previous forecast, when the strengthening of the US dollar was only expected until the end of 2022," said Nick Bennenbroek, economist at Wells Fargo.
In line with the opinion of BofA analysts, Bennerbroek added that the sharper divergence in the monetary policy outlook of the Fed and the ECB will make it harder for EUR/USD to rise.
The Fed has started tapering bond purchases, and expectations of a rate hike are rising. This makes the outlook for the US Dollar brighter. On the other hand, the ECB will still grapple with monetary easing because the increase in Eurozone inflation is less high than the increase in US inflation. Therefore, Wells Fargo revised down their forecast for the EUR/USD rate in 2022, which is in the range of $1.05-$1.10.
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