The euro has been on the rise against the U.S dollar since October 2022, but the advance has not been a straight line and encountered several obstacles. This moderate bullish conviction in the common currency was driven by multiple positive drivers, one of which was the sharp pullback in natural gas prices.
Natural Gas Price Pullback Supports Euro’s Rebound
The EUR/USD’s recovery has coincided with the downward correction in natural gas prices, as shown in Chart 1. European natural gas prices reached record highs above €300/MWh in August 2022 but tumbled more than 85% from those levels. This prevented an energy crisis from unfolding following Russia’s weaponization of fossil fuel exports.
Stabilization of European Economy
The pullback in natural gas prices supported the stabilization of the European economy and even surprised on the upside. Euro zone’s economic activity was projected to grow at a paltry 0.2% in 2023, but consensus estimates now point to a GDP expansion of around 0.8%. The reopening of the Chinese economy also contributed to an improved outlook.
Positive Drivers for the Euro
Aside from the natural gas price pullback, there were other positive drivers for the euro’s rebound against the U.S dollar. These include the European Central Bank’s commitment to maintaining accommodative monetary policy, the region’s strong vaccination campaign, and the global economic recovery.
In conclusion, the euro’s rebound against the U.S dollar has been supported by a pullback in natural gas prices, which prevented an energy crisis and stabilized the European economy. The region’s improved outlook and positive drivers for the euro also contributed to the moderate bullish conviction in the common currency.