China’s performance at the end of last year and at the beginning of 2023 are two different things. The recovery of Asia’s largest economy will be a boon for the export-oriented eurozone. Let’s discuss this topic and make up a trading plan for EURUSD.
Weekly Euro fundamental forecast
The euro declined due to 2022 China’s GDP growth which became the slowest in several decades, and Bloomberg experts’ forecasts that the ECB deposit rate will not rise above 3.25% and will start to decline this year. However, no one can predict the actual ceiling on eurozone borrowing costs. It is worth noting that the report on China’s economic outlook can be viewed not only with alarm but also with relief. Better-than-expected data for October-December suggests that fears of a crash are exaggerated. This means that China can become the main driver of global economic growth in 2023.
Excluding 2020, when China’s GDP expanded only 2.2% due to COVID-19, last year’s 3% increase was the worst since 1976. However, the economy grew 2.9% in the fourth quarter, surpassing Bloomberg experts’ forecast of +1.6%. The specialists expect it to boost by 4.8% in 2023. Morgan Stanley, Bank of America, and Citigroup are even more optimistic, forecasting a 5.5% growth.
Dynamics of Chinese GDP
Source: Bloomberg.
The acceleration of economic growth in China is supporting the export-oriented eurozone. According to investors surveyed by MLIV Pulse, not only luxury goods and the tourism sector will benefit from China’s economic recovery, but also the euro. It will strengthen through an improvement in the eurozone’s current account. Moreover, according to 60% of respondents, Europe will avoid an energy crisis due to lower gas prices.
Goldman Sachs believes that Chinese stocks will rise by 20% this year, strengthening EURUSD due to capital inflows into the European stock market. In the fourth quarter, the European stocks outperformed their US counterparts due to low valuations (forward P/E for EuroStoxx 600 securities is 12, while for S&P 500 is 17). At the same time, the European stock market is more connected with China than with the US.
According to Bloomberg experts, a slowdown in consumer prices from 8.5% to 3.7% and core inflation from 5.1% to 3.5% will also strengthen the eurozone economy. Experts also predict an increase in the deposit rate to 3.25%. The ECB will raise it by 50 bps in February and March, after which it will slow down to 25 bps in May or June.
Dynamics and forecasts of the ECB deposit rate
Source: Bloomberg.
The forecast for the ECB to reduce the borrowing cost in 2023 put some pressure on EURUSD. Up to this point, investors only expected a dovish reversal from the Fed.
Weekly EURUSD trading plan
How will this affect the main currency pair? Perhaps it will stop moving straightforwardly in the short term. Perhaps a serious correction will begin in the second half of the year. I prefer the second option and recommend using EURUSD corrections to enter long trades. At the same time, a fall below 1.078 may provoke a price decline to 1.0745 and 1.069, where active purchases will be profitable.
Price chart of EURUSD in real time mode
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