On Tuesday, the euro bounced back after it had come down to a low of 20 years, very close to parity against the US dollar. This was because of investor concerns about an economic recession that could be triggered by an energy crisis in the region.
Euro falls against the dollar
The euro declined to a value of $1.00005, which is the lowest the single currency has been against the US dollar since December 2002. This was after data showed that investor sentiment in Germany declined to levels even lower than at the beginning of the COVID-19 pandemic. The sentiment took a blow because of the interest rate hike of the European Central Bank (ECB), supply constraints, and energy concerns.
Currency strategists said that things were not looking good for the euro, as the outlook was very gloomy. They said that parity against the US dollar was very likely in the cards for the single currency. It is possible that the euro may decline to levels of 85-90 cents against the greenback.
This could happen because the US Federal Reserve hiking interest rates even more aggressively, along with macro factors such as the European current account that is deteriorating quickly, which could increase pressure on the currency.
The dollar benefits
The dollar has certainly benefitted from the fact that there is more room for the US Federal Reserve when it comes to hiking interest rates, as opposed to other central banks that are facing more challenges in terms of economic growth.
There has been an increase in worries that the European economy could dip into a recession due to the start of the annual maintenance of the biggest pipeline for carrying gas from Russia to Germany, named Nord Stream I. This is because there are concerns that the shutdown might be extended because of the Ukraine war.
Euro bounces back
The euro managed to bounce back from the $1 mark to last trade at $1.0045. According to some analysts, this was because of technical factors related to short-covering and options activity. Market analysts also said that some participants had already been ‘short’ on the single currency because they had anticipated a break in parity.
However, since that had not happened, these investors had simply bought back the currency. It is also possible that the rebound happens because the $1 level is an important one psychologically. Market strategists said that parity was more psychological than anything else, while the chart point that is relevant is $0.98 or $0.96.
The inflation data due for release on Wednesday could eventually push the euro lower, as it is expected to show that consumer prices in the United States climbed by more than 8.8% in June annually. A clearer picture would emerge after the US inflation data, whether the euro will break the parity index against the dollar or not. On Tuesday, the President of the Richmond Fed said that while the central bank would eventually be successful in its fight against inflation, they could not predict the pace.
