The euro has had a rough year in 2022, at least judging by the headlines. After the Russian invasion of Ukraine, the common currency suffered from investors reducing exposure to European assets.
But if we dive into more details, a closer look at the main euro pairs reveals a different story. That is one of resilience and, in some cases, strength.
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2022 was marked by ongoing dollar strength as the Federal Reserve raised the interest rates several times. It even delivered three consecutive “jumbo” rate hikes of 75bp, something unthinkable only a year ago.
Therefore, it is no wonder that the EUR/USD exchange rate dropped by about -9% YTD. However, we should attribute this move to a strong dollar rather than a weak euro. After all, it is logical to assume, given that the US dollar strength is visible on all other major pairs.
Leaving the EUR/USD aside, the other major euro pairs held quite well. And, in some cases, some outperformed, such as the EUR/JPY, up by more than 11% YTD, or the EUR/GBP, which gained over 4% YTD.
Even the EUR/USD bounced from its yearly lows and recovered about 8% of the lost ground. In fact, since September, the euro pairs have been on a tear higher, as the chart below shows.
Going into the last trading weeks of the year, the question is – will the euro keep rising?
To answer it, one should not look at the interest rate decisions anymore but at what the European banks will do regarding TLTROs repayment.
TLTRO repayments – this week’s main event for the euro
On Friday, euro traders will find out the amount of TLTRO loans that commercial banks have decided to repay early. After the ECB changed the TLTRO terms retroactively in October, it is more expensive for commercial banks to keep the loans until maturity. Hence, they will probably pay them early; this is the first window the ECB offers.
The question is – how much will be repaid? Estimates range from EUR200 million to EUR1.5 trillion, so there is a lot of room for speculation, so the stage is set for a big euro move.
A win-win situation for the euro
TLTROs offered excess liquidity in the euro área. By removing it, the ECB is essentially tightening financial conditions, which is bullish for the common currency.
Therefore, the bigger the TLTRO repayments, the more significant the tightening.
What if the TLTROs repayment ends up at the lower end of the range? In that case, the ECB would be forced to adopt a more hawkish tone at the next meeting. Therefore, buying the euro pairs on a dip would make sense from a fundamental perspective.
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