Due to falling to a low of $20.20 per euro, the euro’s performance has been slow in the second half 2022. The drop adds to the fear that the global economy is in a recession and analysts believe that the risk of “parity is just a matter of time now.”
The Euro is near parity with the US dollar
Although the European Central Bank has been facing record levels of inflation, they are much less aggressive than the U.S. regarding raising their benchmark interest rates. On June 27-29, members of the ECB met at the European Central Bank’s annual forum and ECB president Christine Lagarde said: “Monetary policy is at a difficult juncture.”
During the forum meeting, Lagarde further mentioned that the European Union’s (EU) first rate hike this year would happen in July, with a quarter-point percentage increase. She also noted that a rate hike would likely take place in September but would be a larger hike than July’s increase. Pictet Wealth Management head of macroeconomic research Frederik ducrozet thinks that ECB member probably wish they had raised the rate sooner.
“With hindsight, I think many governing council members would have liked to hike rates already in June,” Ducrozet explained. “But it’s a very difficult situation because you know that we are heading into a slowdown,” the Pictet executive added.
EU has few options when it comes to financial management due to inflation and other issues as a result of the war in Ukraine. The dreary European economy has also put significant pressure on the euro, the region’s sovereign fiat currency that’s leveraged in 19 economies. On July 5, 2022 the euro hit a new 20-year low of $1.0281 per Euro, the lowest price against the dollar since December 2002.
Mizuho FX analyst Neil Jones told Bloomberg on Tuesday that parity with the U.S. dollar is “just a matter of time now.” Bloomberg’s options price models indicate that there’s a 60% chance the euro will reach parity with the U.S. dollar. Dominic Bunning, the head of European FX research at HSBC told Bloomberg that it’s “hard to find much positive to say about the EUR.” The analyst added:
With ECB sticking to its line that we will only see a 25bp hike in July – at a time when others are hiking much faster – and waiting for September to deliver a faster tightening, there is also little support coming from higher yields.
In comparison to the US, Pound Sterling Hits a 2-year Low. Euro Expected To See More Volatility
The United Kingdom, in addition to dealing with issues related to inflation and war, is also suffering. The Bank of England has detailed in a report that the U.K.’s economic outlook seems grim, and the central bank notes U.K. households are expected to have payment difficulties. In mid-June, the British pound sterling (GBP) faced the same issues as the euro, as the world’s oldest fiat currency dropped below $1.20 against the U.S. dollar.
In the two-year period March 2020 to March 2020, GBP against dollar has not fallen that low. Analysts believe the euro will see greater volatility in fiat currencies, such as the U.S. Dollar and Swiss Franc. “The FX market is not back up to full liquidity given the U.S. holiday,” Mizuho’s FX analyst concluded on Tuesday. “Any given size of trade is likely to have a greater impact on market movement.”
Do you believe the euro will soon reach parity against the U.S. Dollar? Is it possible that the euro will reach parity with the U.S. dollar in the near-term? Please comment below to let us know your thoughts on this topic.
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