EUR/USD is hovering slightly above the parity level for the first time in the last 20 years. A similar situation was last seen in December 2002. What is the underlying reason behind this dynamic? Why doesn't the euro find support despite the ECB announcement to launch a cycle of monetary tightening? Let's try to figure it out.
First and foremost, the essential reason behind buoyant demand for the US dollar is that it is on the front foot compared to other currencies of developed countries. The greenback is winning favor with investors as a safe-haven asset being the number one reserve currency amid the looming economic crisis and a highly probable economic collapse in Europe. The snowballing economic problems are morphing into political issues, for example, in Sri Lanka. The shelter created by the US dollar is amassing huge capital as a result of the capital flight from emerging markets and Europe. No wonder, under such dismal conditions, the single European currency has been pinned at historic lows. The pressure is escalated by the ongoing economic turbulence in Europe.
The first thing we understand is that the underlying reason for the euro's fundamental weakness is that the US dollar is well supported by the capital inflow to the US. This process is mirrored by rising yields of US Treasuries. In turn, the yields are going up on the back of the cycle of monetary tightening. All these factors avert market participants from investing in US Treasuries. Second, the US dollar is traditionally viewed as a safe haven asset under global economic jitters.
The third reason comes from local causes. The standoff between the EU and Russia has already pushed inflation up to the strongest levels in the last 40 years. The geopolitical tensions are likely to cripple the European economy. The German economy is expected to be the first prey to Russia's aggression in Ukraine as the success of the largest European economy rests on cheap carbohydrates from Russia.
For the time being, the Kremlin is pondering whether to continue oil and gas exports to Europe. Thus, the German economy is facing a tough challenge. By and large, the euro had a zero chance to recover under the conditions of economic havoc and the fact the military conflict is in closeproximity to the EU borders. On the back of such headwinds, EUR/USD could slip to an all-time low of 0.62.
You may wonder whether the ECB rate hike will be able to support the euro. I suppose that the above-mentioned factors considerably outweigh the prospects of a rate hike in the Eurozone. Besides, analysts have serious arguments that the ECB is going to raise interest rates cautiously and not as aggressively as the Federal Reserve.
Let's sum everything up. Under the current economic conditions, like other major currencies, the euro has no chance to begin a steady uptrend against the US dollar. The euro and the pound sterling are taking the brunt of the economic challenge. The sterling has been also bruised by thepolitical crisis in London after the resignation of Boris Johnson. The balance of trading forces will change if inflation in the US will show evident signs of a slowdown and the Federal Reserve will suspend the cycle of rate hikes. It will hardly happen in the near future.
Intraday forecast
USD/CADThe currency pair is trading below 1.3050. Once it is surpassed, USD/CAD might grow to 1.3150 against the backdrop of falling oil prices and in anticipation of the US CPI publication.
GBP/USD
The currency pair is trading below 1.1860. The instrument could break the level amid the broad-based strength of the US dollar and extend its decline to 1.1725.
