EUR/USD breached parity yesterday
Daily Currency UpdateEUR/USD breached parity yesterday for the first time since 2002 and was trading at a market low of 0.9998. The move was driven by a higher than expected US CPI print of 9.1% vs 8.8% expected. This puts the euro on course for one of the worst performing years in its history, especially if the energy price crisis triggered by the Russia-Ukraine conflict pushes the Eurozone into a prolonged economic crisis.
The euro is currently 11.8% down against the USD year-to-date and is almost on par with losses seen in 2015, which was the year the ECB unleashed massive stimulus. The ECB is expected to raise interest rates next week for the first time since 2011 to combat inflation running at a record high of 8.6%. Some investors are hoping the ECB can raise interest rates by more than the expected 25 basis points, however, the European Central Bank may not want to risk aggressive policy tightening for fear of sending economic growth into reverse.
Concerns about Europe’s outlook have increased since the biggest single pipeline carrying Russian gas to Germany, Nord Stream 1, began annual maintenance on Monday. Governments, markets, and companies are worried the shutdown might be extended because of the Ukraine war, which could lead to a further decline in the euro.
Key MoversIn the US, a surprisingly higher than expected inflation reading for June of 9.1% is complicating the outlook for markets, as investors brace for more aggressiveness in monetary tightening from the US Federal Reserve. The US dollar resumed its relentless rise on Thursday, driven by both expectations for faster Federal Reserve policy tightening and safe-haven flows amid growing fears of a recession.
US recession worries have grown over the last few weeks, with several Wall Street banks warning of an increased chance of economic downturn brought on by a more aggressive, inflation-fighting Fed. The International Monetary Fund on Tuesday warned that avoiding a recession in the US will be “increasingly challenging” as it again cut its 2022 US growth forecast.
In the UK, Rishi Sunak won the first round of the Tory leadership vote with 88 votes yesterday. Trade Minister Penny Mordaunt came in second place with 67 votes and Foreign Secretary Liz Truss third with 5. The next round of votes takes place today and the final two candidates will be put to the Tory membership vote by the end of next week. Once there is more political certainty the market could expect some sterling strength.
- GBP/USD: 1.1805 - 1.1955 ▲
- GBP/EUR: 1.1805 - 1.1865 ▲
- EUR/USD: 0.9975 - 1.0065 ▼