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The Euro to Dollar exchange rate (EUR/USD) is forecast higher at HSBC with analysts saying their conviction has been cemented by the most recent set of Balance of Payment (BoP) figures from the Eurozone.
"The Eurozone's February Balance of Payments data provide ongoing reasons for optimism on the EUR," says Dominic Bunning, Head of European FX Research at HSBC.
Eurostat on Thursday reported the Eurozone's international trade in goods surplus reached €4.6BN in February, a surprise given the market was poised for a -€22.3BN figure.
It is also a material improvement on the -€30.6BN reported in January and suggests the region's trade dynamics are improving markedly.
Above: Eurozone current account rebounds.
The trade surplus underpinned February's current account surplus of €21BN (non-seasonally adjusted) which represents a sharp €20BN rise from the same month last year.
This matters for the Euro as the data suggests a positive inflow of earnings from Eurozone production.
"We first highlighted how elements of the Eurozone's external flow backdrop were turning more positive back in December 2022, and followed up on further improvements earlier this year," says Bunning.
The HSBC analyst says the figures suggest exports are beginning to show signs of life following the setback suffered in the aftermath of Russia's invasion of Ukraine which sent commodity prices spiralling.
The rise in gas prices was a particularly acute issue for businesses based in Germany, which is the Eurozone's export engine.
The current account surplus now stands at 1.4% of GDP when averaged over three months, up from a deficit of 2.2% in September 2022.
"This is the largest surplus on this measure since November 2021, when EUR/USD was trading around 1.13," says Bunning.
The EUR/USD is currently stuck below 1.10 as the 2023 rally runs into technical resistance.
But HSBC's economists expect the economic picture to improve further and further widen the current account surplus.
"This should underpin further upside for EUR-USD, especially given what is happening elsewhere on the BoP," says Bunning.
Also supporting positive BoP dynamics was the demand for Eurozone assets by international investors. Fixed income inflows were the biggest contributor as investors snapped up higher-yielding bonds, courtesy of rising interest rates at the European Central Bank.
"Taken together with the current account trajectory, it is hard to argue that the EUR is too elevated. We continue to see a further rally to 1.15 in the months ahead," says Bunning.
EUR/USD Forecasts Q2 2023
Period: Q2 2023 Onwards