The euro has been under significant pressure from both monetary tightening and geopolitical factors. The European currency struggles to keep its footing as EUR approaches parity with USD.
The Federal Reserve has already begun its tightening cycle, while the European Central Bank is still undecided. Analysts say monetary tightening is long overdue. The ECB's indecision is undermining the European currency. The ongoing conflict between Russia and Ukraine has added downward pressure on EUR.
Amid the ongoing situation, market players fear EUR could reach parity with USD. The EU's proximity to the conflict between Russia and Ukraine has pushed down the European currency. Geopolitical tensions have increased price pressure and impaired the eurozone's economic growth prospects. USD has found support in this situation, as EUR continues to sink.
On Wednesday, May 11, the US currency moved near a 20-year high, despite the release of hot inflation data for April. Consumer prices remain high, with the CPI's decline falling short of market expectations. The latest macroeconomic data have affirmed the soundness of hawkish Fed policy.
Analysts say the sizeable gap between Fed and ECB interest rates is pushing the US dollar up. In the meantime, US Treasury yields are in a downward trend, with the yield of 10-year US Treasury bonds peaking on Tuesday and dipping below 3%. US inflation has slightly stabilized.
According to preliminary estimates, inflation in the United States has reached its peak. However, it is unlikely to change the Fed's monetary tightening plans. The market has priced in consecutive 0.5% interest rate hikes at the upcoming Fed policy meetings on June 15 and July 27.
In this situation, the greenback could lose its safe haven asset status due to falling investor demand. This would put the euro into the spotlight in the global market. The peak of Fed monetary tightening would be a turning point for EUR. The European currency's slump against the US dollar would not lead to EUR dropping against other currencies as well.
While EUR/USD has dropped, the euro has steadily advanced against other currencies. Many experts consider the possible parity between EUR and USD to be a bullish bet in the US dollar.
The pair traded near 1.0477 early on Thursday, May 12, and approached the 5-year low at 1.0469. EUR/USD touched this low in April 2022. The ECB's decision to increase the interest rate in July for the first time in 10 years has given some support to the EU currency.
According to recent reports, major hedge funds are net short on EUR following the April meeting of the ECB. Although Christine Lagarde has been flexible in her rhetoric, the market has priced in the hawkish outlooks by the ECB. Many asset managers have reduced their exposure to EUR, despite optimism in the market. Investors are not confident in further actions of the EU central bank due to geopolitical instability exacerbated by the conflict between Russia and Ukraine.
There's nothing that could stop EUR from falling below 1.0500, analysts say. The European currency remains in a downtrend. The chance of the pair breaking out of it in the near future are low. While reaching the parity level of 1.0000 would possibly not sink the euro, an upward reversal of EUR/USD towards 1.1000 would be unlikely. A EUR/USD rally would require a significant geopolitical shift. However, EUR/USD reaching parity is likely to be a lengthy process that would not be over even in the medium term.
