Despite the Euro’s rout against the dollar this year, a reversal of the decline could be on the cards in December. The ECB is in the midst of an aggressive tightening cycle, which is likely to extend into next year. Moreover, a rebound in retail sentiment could fuel a further push towards higher highs in EUR/USD. However, a sustained break below parity could send the pair sliding toward 0.9950.
Inflation in the euro zone continued to rise unabated in August. According to a flash estimate, the consumer price index in the EU climbed to 9.1%. However, the German Producer Price Index came in at 2.3%. Moreover, Russia has threatened to permanently shut down its main natural gas pipeline to the EU, which could destabilize the eurozone economic outlook.
The US Dollar has been pushed lower by a weaker-than-expected GDP print in the second quarter. The US Consumer Price Index is also expected to show slowing inflation in October. If this comes to fruition, then a Fed rate hike might not be necessary this year. The Fed could instead pursue soft-landing policy. Moreover, Fed Chair Jay Powell’s speech may also have an impact on the market.
The euro has slid below parity with the dollar in the last couple of days. This has amplified concerns of a possible euro area recession next year. Moreover, eurozone inflation continues to rise, putting pressure on the ECB to adopt a more hawkish stance. A rebound from this drop could push EUR/USD towards a fresh monthly high. However, the currency has fallen behind commodity bloc currencies and is likely to underperform the Australian dollar, the Swiss franc and the Japanese yen. Moreover, a weaker-than-expected US GDP print could weigh on EUR/USD.
A sharp drop in European natural gas prices gave the currency its initial boost. However, Russian’s threatening to permanently shut down its Nord Stream 1 pipeline to the EU, which could destabilize European energy supplies, has put fresh pressure on the euro. The ECB’s governing council has warned that it expects inflation to stay above its 2% target, while policymakers have also pre-committed to further interest rate hikes in July and September. This may mut inflation in the euro zone, but may also boost the euro’s resilience.
The euro’s decline has also helped boost the US Dollar against its major rivals. This is because the ECB’s policymakers have signaled that an eight-year era of negative interest rates is coming to an end. The US Dollar also gains from flight-to-quality flows. Moreover, the euro to US dollar rate has dropped from a record high of $1.0317 to just under $0.99. The euro has dropped 11 percent this year.
The euro to US dollar rate fell below $0.99 level for the first time in 20 years. However, EUR/USD recovered after the ECB hiked its interest rates on 8 September. Moreover, the euro recovered after US Non-Farm Payrolls data came in at a stronger-than-expected level. However, the euro could face a test of its September high if the ECB surprises later.