Euro is on the brink of parity with the US dollar due to fears of recession
A financial retailer monitors data on computer screens while a stationary TV displays euro banknotes on the Frankfurt Stock Exchange in Frankfurt, Germany.
Martin Leissl | Bloomberg | Getty pictures
The euro soared near parity with the US dollar on Tuesday, as the eurozone’s energy supply crisis and economic problems continue to push the single currency.
The euro traded 0.2% lower at around $ 1[ads1],002 during morning deals in London, and paired past losses that pushed the single currency to the brink of parity with the dollar.
Fears of a recession have grown in recent weeks due to growing uncertainty over the bloc’s energy supply, with Russia threatening to further reduce gas flows to Germany and the wider continent.
Russia temporarily halted gas supplies via the Nord Stream 1 pipeline on Monday for annual maintenance work in the summer. The pipeline is Europe’s largest single gas import infrastructure, transporting around 55 billion cubic meters of gas per year from Russia to Germany via the Baltic Sea.
The planned 10-day suspension of gas flows has created fears of a permanent cut in supplies, potentially derailed the region’s winter supply preparations and exacerbated a gas crisis.
“There is a central and obvious psychological level that is very threatened here,” Jeremy Stretch, head of G-10 FX strategy at CIBC Capital Market, told CNBC’s “Street Signs Europe” on Tuesday.
Stretch said the prospect of the euro falling below this level was a reflection of nascent recession fears across the eurozone.
ECB in a “very, very difficult position”
The prospect of a stronger economic downturn has also cast doubt on whether the European Central Bank will be able to tighten monetary policy aggressively enough to curb record high inflation without deepening economic pain.
“The ECB is in a very, very difficult position. You could argue that the ECB has been quite late with the party both in terms of ending their bond purchases, but also considering monetary policy,” Stretch said.
He added that while the ECB “clearly missed a trick” at its last meeting, medium-term inflation expectations had retreated against the central bank’s benchmark.
“This is one sign that these inflation expectations may not necessarily be significantly anchored in the medium to long term, but clear from an ECB policy signal perspective … the need to act and act quickly is clear,” Stretch said.
Graham Secker, head of European equities strategist at Morgan Stanley, said the weakness of the euro could boost European companies ahead of the upcoming second-quarter earnings season.
“Twelve months ago, the euro was above $ 1.20, and now we’re obviously very close to parity, so there’s a pretty significant tailwind to earnings at the moment, but I see it as a positive offset against some of the other negative factors. which is under development, “Secker told CNBC’s” Street Signs Europe “.
“Right now, our expectation is that the second-quarter earnings season is likely to end with a net hit,” he added.
