The euro continues to slide toward dollar parity – and could fall further

The euro It fell below $1.02 this week, and continues its slide to 20-year lows and potentially parity with U.S. dollar.

The euro traded as low as $1.0165 on Wednesday afternoon in Europe, before recovering slightly to hover above the $1.02 mark on Thursday morning.

The eurozone’s single currency has seen a steady decline as fears of a recession grow there on the back of growing uncertainty over energy supplies to the bloc, as Russia threatens to further cut gas supplies to Germany and the wider continent.

The possibility of an economic slowdown also casts doubt on whether European Central Bank It will be able to tighten monetary policy enough to rein in record high inflation.

German Bank He noted in a note on Wednesday that pressure points extend beyond the German natural gas shortage to the broader European energy market, as evidenced by France. EDF Announcing more power outages on Wednesday morning.

George Saravelos, head of foreign exchange research at Deutsche Global, suggested that “safe haven” moves toward the US dollar could become “more extreme” as the US enters a technical recession, adding downward pressure on EURUSD trading.

“We concluded that a drop to 0.95-0.97 in EUR/USD would be in line with the absolutely extremes in exchange rates and the USD risk premium since the end of Bretton Woods,” Saravelos said.

“If both Europe and the US find themselves sliding into a (deeper) recession in the third quarter while the Fed is still raising interest rates, those levels can be reached.”

He pointed out that one of the main motivating factors that could reflect the strength of the US dollar, is an indication that the Federal Reserve is entering a prolonged pause in the monetary policy tightening cycle, facilitating the release of some of the risk premium baked in the dollar.

The DXY index in US dollars It is up more than 11% year-to-date, and was last trading just below the 107 mark.

Meanwhile, a “clear peak” in European energy tensions by ending hostilities in Ukraine may provide a higher path for the euro.

Saravelos added, “Continuing (partial) supply of Russian gas during the summer will not be sufficient in our opinion because the risks of closure will continue in the winter.”

The bleak outlook for the European economy comes as the European Central Bank announced its intention to raise interest rates for the first time since 2011, with inflation in the Eurozone rising to 8.6%.

Central banks around the world are in trouble as they try to rein in inflation without deepening the economic slowdown, which data suggests is getting closer than ever.

The Fed has already pulled off the hurdles of tightening, having raised its benchmark interest rate by 75 basis points in June while slashing its growth forecast for 2022.

The minutes of the last meeting of the Federal Open Market Committee showed the concern of policy makers that the central bank will lose credibility if inflation worsens.

In a research note on Tuesday, Capital Economics markets economist Franziska Palmas said investors from various asset classes are ignoring negative economic outcomes in the eurozone.

“While we believe it will take a further marked deterioration in the outlook for the eurozone economy for continued underperformance of the euro and eurozone assets, we still expect them to struggle more,” she said.

“On the one hand, we believe that gas supplies in the eurozone will remain tight and gas prices high. This is part of the reason why we expect the eurozone economy to flirt with recession this year, although we are only assuming a slowdown rather than a halt in Russian gas supplies.”

Palmas added that the backdrop of high interest rates by central banks and disappointing global economic growth will keep downward pressure on risky assets and cause more investors to flee to the traditional “safe haven” US dollar.

“The upshot is that while we do not expect eurozone assets to continue to underperform their DM peers, we expect their absolute underperformance to remain underperformed this year and next,” she said.

Germany on Monday posted its first trade deficit in goods since 1991 as higher energy prices pushed up import costs for Europe’s largest economy, while global trade disruptions also choked exports.

These numbers were among a batch of data released in recent days that highlighted increasingly challenging economic conditions in the Eurozone. The July Sentix Economic Index Monday showed investor sentiment in the 19-nation euro zone fell to its lowest level since May 2020, which it said indicated an “inevitable” recession.

“Given the price-sensitive nature of German exports, it is still hard to imagine that the trade balance could improve significantly from here in the next few months given the expected slowdown in the eurozone economy,” said Saxo Bank analysts. Note last week.

“In the meantime, higher energy prices will continue to weigh on the trade balance as well, and sentiment toward the euro may dampen. EURUSD is likely to find it difficult to surpass 1.0500 in a sustainable manner, and thus focus is on 1.0350 support.”