Euro parity still in play ahead of crucial US inflation data

The euro bounced off a low of $1.00003 on Tuesday — its weakest since 2002 — and is holding at about $1.003.
Image: Hannelore Foerster/Getty Images

The euro might have narrowly avoided parity with the dollar so far, but strategists see it as an inevitable waypoint in a slide that could leave the common currency trading well below that milestone.

The euro bounced off a low of $1.00003 on Tuesday — its weakest since 2002 — and is holding at about $1.003. It could come under fresh pressure as soon as today, particularly if the latest US inflation data fuel expectations of a relatively more hawkish Federal Reserve.

The bid for haven assets such as the greenback is unlikely to abate amid a darkening global growth outlook. The picture in Europe is particularly grim, given fears that a halt to gas flows from Russia could trigger an economic crisis in the region and curtail the European Central Bank’s ability to raise rates, a major headwind for the currency.

“It won’t take much to tip the euro below that parity number,” said David Page, head of macro research at AXA Investment Managers. “It’s more than just an interest-rate story; it’s much more fundamental. The adverse risks in the global economy are joining up to support the dollar at the moment,” he said in a phone interview.

Economists project US inflation likely hit a pandemic peak in June that could cement a second consecutive 75 basis-point hike from the Fed. The consumer-price index probably rose 8.8% from a year earlier, the largest jump since 1981, according to a Bloomberg survey ahead of Wednesday’s release.

Nomura Holdings Inc., UBS Group AG and BCA Research Inc. see the euro plunging as low as $0.90 by the winter in a worst-case scenario. It has already fallen almost 12% against the dollar this year.

Technically, bearish signals suggest that a move below parity remains the base case. At the moment, parity coincides with support from a trend channel in place since February.

“None of the positive euro factors seem close to materializing, so the magnetic attraction of EUR/USD sub parity might be irresistible for macro investors,” said Stephen Innes, managing partner at SPI Asset Management.

Shared woes

The single currency is even struggling to catch a break against the pound. That’s as the UK grapples with political uncertainty, the aftermath of Brexit and searing inflation — an outlook so dire that it has prompted Bank of America strategists to warn of an existential crisis for sterling.

The euro posted its worst weekly performance against pound since March last week, and has since dropped further to about 84.20 pence. It got a small boost Wednesday after comments from Bank of England Governor Andrew Bailey hinted at bigger rate hikes, climbing as much as 0.4% to $1.1936.

Dominic Bunning, a foreign exchange strategist at HSBC Holdings Plc, sees the pair trading back toward 84/83 pence, with much of the negative news now priced into the pound. While he’s not recommending an outright buy for sterling — particularly against the dollar — it may start to make headway against the euro, he said.

Not everyone agrees. Mathieu Savary, chief European strategist at BCA Research Inc., sees the single currency climbing back to 90 pence given the potent headwinds confronting the pound. Still, he urged caution over trying to call the euro’s bottom versus the dollar, particularly as it drops below $1.

“The odds are high that automatic selling will be triggered if the euro tests parity, which would result in a cascading decline for a euro entering territory that has not been charted for the past 20 years,” he said. “Don’t be a hero.”

© 2022 Bloomberg

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