There is an impending gas crisis and high inflation euro For the first time since 2002, it was pushed below parity with the dollar. At the bottom, it dropped to as low as $0.999995. The common currency is currently just above parity at $1.0022. At the beginning of the year, the common currency was still quoted at $1.1370.
The slide below parity had already been announced in the past few days. In addition to the long-standing supply chain problems and high inflation, it is above all the looming gas crisis that is weighing on the euro. According to Société Générale analyst Kit Jucks, a complete halt to Russian gas supplies to Europe is likely to lead to a recession in the euro area and a further 10 percent fall in the euro. Even the best-case scenario – a continuation of the status quo – will upset the markets and should provide the best support for the euro, expects Jux.
Commerzbank foreign exchange analyst Ulrich Leuchmann sees a significant increase in inflation expectations in Europe. With gas prices rising higher, there is a growing risk that another inflationary shock will occur. There is no need to speculate whether it will be positive or negative for the Euro. In a gas crisis, the European Central Bank (ECB) could only do what was absolutely necessary to combat inflation: enough to stop a spiral of euro depreciation and inflation acceleration. According to Leuchtmann, some may even fear that she will not be able to do it herself. Therefore, the euro weakens.
The euro’s sharp loss could encourage the ECB to raise interest rates announced at its next meeting on July 21, FX analysts at ING note. Macro’s global head Carsten Brzeski said the ECB could raise interest rates by 50 basis points, compared to the 25 basis points it had promised at the June meeting.
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