Published on 12.07.2022 09:05

After slumping in yesterday’s trading session to within a whisker of parity against the US dollar, the Euro bulls have stepped in to defend this critical level, but it is going to be a tough job for them to hold on over the next few days.

Sending the Euro spiraling down yesterday was caused by fears that Russian President Vladimir Putin would cut off some key energy exports to the European Union. Gazprom temporarily shut down Nord Stream 1, the biggest single pipeline carrying Russian gas to Germany, for annual maintenance. The tap is expected to be turned on again in 10 days but market participants speculate that the Russian government could use the situation as an excuse to restrict gas supplies indefinitely in retaliation for sanctions imposed by the West following the invasion of Ukraine.

Should Nord Stream 1 remain out of service beyond the maintenance period scheduled to end on July 21, the price of natural gas is likely to go through the roof reaching a new all-time high and add to the inflationary pressures in Europe. This scenario will also create massive gas shortages in the region, prompting authorities to implement fuel rationing in residential areas and for businesses to reduce energy consumption heading into the winter season, paving the way for what could be a deep recession.

Developments on the other side of the Atlantic, specifically in the United States, could also be a catalyst to push the Euro below parity with the greenback. The latest CPI figures are due out from the US tomorrow and are expected to show annual inflation accelerating to around 9% on the back of soaring prices at the pump.

This will cause the US federal Reserve to introduce another 75 basis points interest rate hike at the July FOMC meeting and possibly September, as policymakers attempt to reign in inflation which is sitting at its highest level in over 40 years. Monetary policy divergence between the Fed and the ECB, along with significant downside risks to growth in the Eurozone, will ensure that the US dollar remains well supported not just against the Euro, but all of the major currencies.

Looking ahead today, the main driver of the EUR/USD currency pair will be the release of the Zew economic sediment index from Germany which is expected to hit the market at -32.8 against a reading of -28 last month.

Should the figure come in on expectations or below we may not have to wait until tomorrow to see the Euro worth less than a US dollar for the first time in over 20 years.