Fed Keeps Up Aggression: How Low Can the Euro Go?

The US dollar continues to trend higher against its major world counterparts, hitting the 24-year high against the Japanese yen, a 20-year high against the euro, while the dollar index tracks the green dollar’s yield against the basket of major currencies , trades at. levels last seen in 2002.

Several factors contributed to the strength of the dollar, with key drivers having strong safe flows due to growing geopolitical uncertainty due to the war in Ukraine, slowing economic growth with threats that US and EU economies are slipping into recession and rising inflation that prompted the growth of the economy. US Federal Reserve to raise interest rates.

All three factors are strong and linked, as conflict in Ukraine and subsequent Western sanctions against Russian energy have led to a shortage of oil and gas supplies and pushed energy prices significantly higher.

This has fueled inflation and raised fears of a major economic slowdown and a possible recession.

At the same time, growing uncertainty with no signs of feasible solutions to the problem and fear that conditions are likely to worsen in coming months has prompted investors of riskier assets in securities, which have provided a further boost to the U.S. currency.

Recent support for the dollar came from the US inflation report, released on July 13 and showing that

U.S. inflation continued to rise and hit 9.1% in June, from 8.6% the previous month and well above the forecasts for an 8.8% rise, suggesting that underlying inflationary pressures remained strong in June, as so-called core inflation that excludes volatile food and energy components , rose to 0.7% m / m in June from 0.6% in May.

The latest jump in U.S. consumer prices was the largest annual rise in inflation since late 1981 and mainly driven by a continued rise in energy and food prices, but also by a massive fiscal stimulus the government pumped into the economy during a Covid pandemic crisis and ongoing . supply shortages.

La US Central Bank responded to rising inflation by several rates in the past few months, with the last 0.75% increase being the highest since 1994 and the central bank signaling further increases.

The situation with rising inflation threatening to take root is putting pressure on the Fed for a more aggressive approach in political tightening, which has resulted in recent speculation of a 1% interest rate hike in its July policy meeting, rather than a widely expected 0.75% rise.

On the other hand, the Euro is under increased pressure and is cracking at the same level, trading in this zone for the first time since 2002.

The single currency has fallen against the U.S. dollar by about 11% from the year to date and is on track for further weakness in current economic and geopolitical conditions, which could result in one of the largest annual falls in the history of euros.

The euro is under pressure from the deepening crisis the European Unionmainly from the aftermath of the war in Ukraine and sanctions on Russia, but also from a growing divergence between the monetary policies of the US Federal Reserve and the European Central Bank.

While the Fed maintains an increasingly volatile stance and concentrates on tightening monetary policy or raising interest rates, in attempts to combat raging inflation, the European Central Bank has a more cautious approach to the problem.

The latest economic data indicates that the EU economy is slowing, with strong threats of recession and aggressive growth of the borrowing cost would have a negative impact on economic growth and are likely to accelerate the path to recession that keeps the ECB on track for small and small. gradual rates, despite record inflation in the Eurozone.

The European Union also faces major problems with gas supplies, as the Nordstream 1 pipeline, which is the main supply line for Germany, has been closed for maintenance, but unionists fear a shutdown may not be temporary, which would bring the EU economy and especially Germany as. the largest economy in the union, in an extremely difficult position, which can result in prolonged restrictions, but also in a partial or complete cessation of the industry.

All of these factors weigh heavily on euro, which is at critical support and a break lower would risk an acceleration to 0.9600 zone (September 2002 low) with more pessimistic forecasts suggesting that the single currency may fall further and challenge 0.90 support.