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Euro close to parity against the US dollar

Daily Currency Update

Bank of England Governor, Andrew Bailey, said on Monday that he still thought that inflation was likely to fall sharply next year, broadly in line with forecasts the British central bank presented in early May. Bailey expects inflation, which hit a 40-year high of 9.1% in May, is likely to be back at its 2% target in about two years, however, it’s possible that there will be further upward pressure on energy prices following Russia’s invasion of Ukraine.

The BoE had previously forecast that inflation would peak at just over 11% in October this year when energy prices are expected to increase again. Some investors now believe there is a 70% chance of a 50 basis point interest rate hike by the BoE at their August meeting. The central bank has already raised interest rates five times since December and the BoE said last month it was ready to act “forcefully” if needed to prevent high inflation from becoming embedded in the economy.


Key Movers

The euro is at a 20-year low against the US dollar and potentially on the brink of parity as high inflation, the prospect of an energy shortage should Russia cut off Europe’s gas supply this winter, and the possibility of recession, has caused the euro to be the worst performing G10 currency.

The euro dropped as low as $1.0005 against the US dollar in early trading today, a new 20-year low, compared with near $1.15 highs at the start of this year. Russia turned off the single biggest pipeline carrying gas to Germany on Monday for annual maintenance. That work is expected to last for 10 days, but governments, markets, and companies are worried the shutdown might be extended because of the war in Ukraine.

If Vladimir Putin decides to turn off gas supplies to Europe this winter, countries such as Germany could face gas rationing, potentially forcing industries to suspend work, and leaving families struggling to heat their homes.

The US dollar is benefitting from uncertainty surrounding this, plus concerns that US inflation could hit a new 40-year high on Wednesday's CPI release. That could prompt a more aggressive interest rate rise from the Federal Reserve, potentially strengthening the US currency, especially after a better-than-expected jobs report last week which calmed recession worries.

Expected Ranges

  • GBP/USD: 1.1835 - 1.1925 ▲
  • GBP/EUR: 1.1815 - 1.1905 ▲
  • EUR/USD: 0.9985 - 1.0065 ▼