24 Aug 2022
Macro-economic insights 2022. Part 1: Currency
Changes in currency exchange rates are, at the moment, one of the factors influencing the cost changes in the wide format printing market. Recently, the strengthening of the US dollar and the weakening of the euro have increased and continue to increase the cost of materials and the final printing products. What are the trends of the currency market in the near future? Is it possible to control the risk of exchange rate changes?
Why are the US Dollar strengthening and the Euro weakening?
The changes are influenced by the current macroeconomic environment, which has little stability. Regrouping political alliances and the dramatically changed demand for raw materials and energy resources due to sanctions are raising their prices. Since the US dollar is the main currency of the raw materials market in which settlements are made, the demand for this currency grows simultaneously, strengthening it against the euro.
In addition, the US dollar offers higher interest rates and lower geopolitical and energy risks for the US than for Europe. Additionally, the USD currency is supported by the US becoming the world’s top producer of agriculture and energy.
Forecast: How will the exchange rate between the US dollar and the euro change in the future?
We still see significant differences between US and EU macro-economic data, especially since the EU’s energy crisis is worsening.
The role of European and US central banks in regulating economic development through changing the base interest rate is also important here. After all, higher interest rates not only reduce inflation in the country but also increase the demand for that currency. It is expected that the Fed Funds, the US central bank, will implement a much more aggressive policy – increasing interest rates at a faster pace and thereby strengthening the US dollar.
According to market estimates based on Fed Funds futures data, US interest rates could reach 3.5 to 3.75% by the end of the year. Although the European Central Bank (ECB) may be less aggressive given the likelihood of an economic slowdown at year’s end, the EU heavily depends on financial data.
The market anticipates that US interest rates will peak the following year and then begin to decline along with the national economy.
Therefore, it might be better to anticipate higher EUR/USD upside corrections in the coming year, starting in the second quarter or later.
How to manage risk?
The current environment is more favorable for the USD, so it is wise to base budget planning on more robust USD forecasts. Financial instruments that fix the current rate of the US dollar for the future (futures) would be a good solution that can help reduce or neutralize potential losses due to fluctuations in exchange rates. An even more effective way is to prepare a full strategy for such price-fixing instruments and actively manage them. Large companies have separate departments for this; small ones have the opportunity to outsource these services using the services of financial risk managers.
*The analysis was prepared by our FX risk management partners CorpHedge.