August 16, 2022

Euro Back Above Parity And Dollar Dips After Inflation Surge

The euro managed to bounce back from parity and the dollar came down from a 20-year high after the US consumer price data on Wednesday turned out to be higher than expectations. The data showed that inflation had increased by 9.1% in June, which is the highest figure in almost four decades. This means that Americans had to pay more for food, rent, healthcare, and gasoline.

The euro impact

The rise in inflation had an impact on the euro, as it declined against the US dollar to a low of $0.9998 after the data release. It broke the $1 level that had last happened in December 2002, but it bounced back and was trading at $1.0056.

It is considered that the single currency has support at this $1 level. As for the US dollar index, it hit 108.59, which it hadn’t done since October 2002. However, the currency then declined to a low of 108.01.

The euro is suffering because Europe is facing an energy crisis, which is happening because of the Western sanctions imposed against Russia because of its Ukraine invasion. Market analysts said that the sanctions meant to hurt Russia are also hurting the eurozone. Things were already tough for the European economy as it was recovering from the pandemic, but this additional issue has only made the common currency less attractive for investors.

Economic concerns rise

There is a great deal of worry associated with the future of Europe’s economic outlook and things are heating up as Nord Stream 1, the single biggest pipeline that transports gas from Russia to Germany has been closed for its annual maintenance. The concern is that this shutdown could be extended because of the Russia and Ukraine conflict, thereby denying Europe of gas.

The US Federal Reserve is also scheduled to meet at the end of the month and is expected to hike interest rates more than the European Central Bank. This has become certain after the US inflation data, as analysts said that the number turned out to be extremely high. They added that it is apparent that inflation is moving in the wrong direction.

Interest rate path

Traders hiked up bets that after the US inflation data that there could be a 100 basis point increase in the interest rates in the next meeting of the Fed. It is certain that at least a 75 basis points increase will happen.

Raphael Bostic, the President of the Atlanta Fed, said on Wednesday that policymakers may have to consider an increase of 100 basis points because of high the inflation has turned out. As far as the ECB is concerned, it is not expected to increase interest rates by more than 25 basis points in its meeting on July 21st.

This would be the central bank’s first hike after 2011. The depreciation of the euro is unlikely to alter the rate path of the ECB. The bank is keeping an eye on the euro because of its inflationary impact and not because they want to hit a specific level.

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