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EURUSD: Life after Parity
Information is not investment advice
Recently, for the first time in two decades, the euro reached parity with the US dollar. Now bulls try so hard to prevent it again, however, it seems like not the end.
What is happening?
The major currency fell to a one-for-one rate with the US dollar. After that, on Tuesday, EURUSD made a last-ditch effort to prevent the parity again. At the moment, the EUR bounced from the 1.0000 support level and recovered up to 1.00415. However, this boundary could quickly collapse if new concerns about natural gas supplies from Russia or signs of a relatively tighter Fed policy led to a decline in the euro.
It looks like many traders believe that Tuesday's price action is an isolated case of such barrier defense. However, If the level does break, there is a chance that it could drop significantly further. The next long-term target for the currency could be around 90 US cents if the Nord Stream 1 gas pipeline doesn’t resume operation.
How is situation in Eurozone now?
The energy crisis is a huge problem for Europe now. Moreover, there are talks about the chance of recession for Eurozone. A weaker euro exacerbates inflationary pressures in Europe, making imports, especially key commodities, more expensive. And, unlike in the past, a weaker euro isn’t expected to provide much stimulus to the bloc's producers, making exports more attractive abroad. This week, Germany reported its first trade deficit since 1991. Exports from the industrial heartland of Europe declined in May, despite the weakness of the euro.
However, Governing Council member Francois Villeroy De Galhau insisted that it’s not the weak EUR, it’s the strong USD. In fact, he’s got the point. The Fed’s hawking policy made the USD grow every week against other assets, for example, USDJPY isn’t a save-haven anymore and the gold is under $1800.
Future possible ways
Due to the fact that the price is still really close to the 1.0000 level, any economic data releases, related to either the USD or the EUR, and geopolitical news, connected to commodities, can drop EURUSD even lower. The nearest event is US CPI on July 13 can push the USD up, so it’s going to be a real challenge for the EUR.
The major currency pair may reach the December 2002 low near 0.9860. EURUSD has limited downside potential, but a corrective pullback is likely to reverse the bearish trend. We’ll keep an eye on this pair, as it brings pretty unusual options to trade.
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