December could be Euro’s best month

The average monthly performance of the Euro against the US dollar for the last 20 years shows that the EUR/USD pair usually rises in December according to several economists. The last 20 Decembers are seen as perfect time for the EUR/USD to rise on 16 occasions out of the total 20, making it the Euro’s best month.

Part of the reason why December is best winner may be that Euro sentiment was negative more often over that period. The average position in the forex markets, for example, has been short Euros over that period. This means that there is frequently pressure to cover short Euro positions into the end of the year.

January is usually the Euro’s worst month, perhaps because the bearish sentiment does not go away. This year, with a massive Dollar-bullish consensus taking EUR/USD lower, short-covering pressures may be even bigger than usual.

The danger is that the conditions for a January EUR/USD shake are simple to perceive. US consumers, still supported by strong balance sheets, do not stop spending, and the Fed is forced to maintain its hawkish stance in 2023.

Winter temperature in Europe and concerns about energy supplies are growing. Russian missile attacks on Ukraine add to further fears of a bloody impasse. That kind of news after a strong Euro rebound is exactly the kind of icy path that even a careful currency strategist could fall over on.

It is worth mentioning that the European Commission’s autumn forecasts highlight that fiscal risks to eurozone sovereigns from the energy crisis will persist in 2023, Fitch Ratings says. Draft Budgetary Plans (DBPs) already implied slower deficit reduction relative both to 2021-2022 and governments’ initial plans, although some high-debt countries appear to be tailoring their responses to accommodate fiscal constraints and tighter monetary policy.

The Commission forecasts an aggregate 2023 eurozone deficit of 3.7% of GDP versus 3.5% in 2022. This would represent a weaker outturn than the 3.4% deficit implied by the 2023 DBPs, partly reflecting growth assumptions.

The Commission forecasts eurozone real GDP to increase 0.3% in 2023 and its forecasts for individual economies are almost all more pessimistic than the DBPs. The 1.6% growth implied by the DBPs incorporates Germany’s use of a 2.5% real GDP growth forecast for 2023. More recent German government forecasts see output contracting by 0.4% next year, closer to the Commission’s -0.6% forecast.