In the past week, the Euro has slumped to its lowest level in more than two decades. The decline has prompted many analysts to attribute it to the expectations for rapid interest rate increases by the U.S. Federal Reserve.
US data released last week, however, did not support this argument. A softer than expected increase in the Consumer Price Index was not enough to convince the Fed to rethink its policy. Instead, the Fed paraded a stream of officials who insisted that it would continue its rate hikes. This message reinforced recessionary fears. It also added to the sense that the United States has an unusually aggressive monetary policy.
Although the Euro has been in a long rally, it has been struggling to overcome a downslope trendline drawn from its May 2022 highs. This seven-month-old trendline passes around the 1.0580/1.0600 area. That may offer resistance to buyers.
However, the euro has managed to climb back above the 200-day moving average. It is currently trading at 1.0538, which is still well above its 20-year low at 0.9536. As the United States and the Eurozone are key trade partners, their currency exchange rates can be a good measure of economic prospects.
But a weaker euro could lead to higher prices for imported goods, such as oil. If the European economy is too weak to support higher interest rates, the central bank could opt for a pause.
The US dollar recovered strongly yesterday. Its strength was fueled by higher bond yields. With a busy week of central bank meetings and inflation data coming, the Fed has a lot to say. While markets were initially encouraged, momentum declined late in the session.
This week, the euro dipped to fresh two-week lows. On Monday, the pair slipped to an eight-month low near 1.1810. Despite the decline, it remains above the seven-month downslope trendline and will likely be bought on dips.
Meanwhile, European stocks were up sharply. Earlier in the day, the German ZEW economic sentiment index rose to a 5-month high of 71.2. However, this figure is only half the level of January’s 58.3, suggesting that the outlook for the Euro remains uncertain.
Another major factor that has pushed the euro lower is the crisis in Europe’s energy sector. Russia has cut back natural gas supplies to the European Union. These fears are causing oil and gas prices to surge.
Traders are wary of the euro because of the possibility that the economy in the EU is weak. However, the recent slowdown in the Spanish and German inflation rates could be a signal that the economy is turning a corner.
However, a more hawkish Fed could lead to an unexpected downturn in the USD. Depending on the results of today’s inflation reports, the Euro could drop below parity with the dollar.
If inflation does not increase as expected, it will be hard to justify the recent ECB hikes. In the meantime, investors will be attracted to the US Dollar.