(Bloomberg) -- The euro is heading for its best week against the dollar since November, a rally that may have plenty more room to run.
The single currency is up around 1.6% against the greenback this week, touching a nine-month high just above $1.08 after Thursday’s data showed US inflation continued to slow. The release sapped demand for the dollar as traders trimmed their expectations for tightening from the Federal Reserve.
It’s a remarkable comeback for a currency which was trading below parity as recently as November. Signs the Fed may be approaching the end of its hiking cycle promises to be a key driver for the euro rebound, given that European Central Bank officials are still tilting hawkish.
“Parity talks dominated forex debates in 2022, but it may be a matter of time before $1.20 calls emerge. We won’t dispute those,” Audrey Childe-Freeman, chief G10 FX strategist at Bloomberg Intelligence, wrote in a note. “That’s a feasible level, and is still 14% below its 2014 high near $1.40.”
Markets are now leaning toward a 25 basis-point rate rise from the Fed come February, the smallest in nearly a year. For much of last year it tightened policy in 75 basis-point increments.
While traders are wagering the ECB will raise rates by another 140 basis points, only around 60 basis points of further Fed tightening is priced for the rest of 2023.
“The ECB has taken on the baton of being the more hawkish central bank,” Kamakshya Trivedi, currency strategist at Goldman Sachs Group Inc. said in an interview with Bloomberg TV. He compared that to last year, when the Fed took the lead in aggressive rate hikes and drove the dollar to record highs.
The euro’s gains also reflect a surge of optimism over Europe’s economic outlook, given lower gas prices and China’s reopening, which is seen as a boon for trade. Goldman economists no longer predict a euro-zone recession for 2023, potentially clearing the path to higher rates.
Fears of a winter fuel crisis have dissipated as Europe’s mild weather has sent consumption and the price of natural gas plummeting, while stockpiles are fuller than usual for this time of the year.
Read more: Wall Street Goes All In on Euro to Keep Charging Higher
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