The euro has had a sluggish start to the second half of 2022 as the fiat currency slid to a 20-year low against the U.S. dollar. 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.”
Euro Nears Parity With US Dollar
Policymakers at the European Central Bank (ECB) have been dealing with record inflation levels but have been much slower than the U.S. in terms of raising the benchmark interest rate. 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. Frederik Ducrozet, the head of macroeconomic research at Pictet Wealth Management, believes that ECB members probably wish they raised the bank rate sooner.
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“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.
Inflation and issues tied to the war in Ukraine have put the EU in a financial pickle with fewer choices on the table. The dreary European economy has also put significant pressure on the euro, the region’s sovereign fiat currency that’s leveraged in 19 economies. The euro tapped a 20-year low on July 5, 2022, hitting $1.0281 per euro, which is the lowest value against the U.S. 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.
Pound Sterling Hits 2-Year Low Against the USD, Euro Expected to See More Volatility
In addition to the ECB dealing with inflation and issues connected to the war, the United Kingdom is suffering as well. 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.
The GBP has not dropped that low against the dollar in two years since March 2020. Analysts expect the euro to see more volatility between fiat currencies like the U.S. dollar and the 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.”
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