The energy crisis in the EU continues to deepen amid Russia's full shutdown of the Nord Stream pipeline over the past weekend. The interruption of gas supply has sent the euro downwards once again.
Early on Monday, the European currency lost 0.5% against the US dollar and hit a 20-year low at 0.9903.
EUR/USD came under pressure following Russia's decision to extend maintenance of the Nord Stream pipeline. Gazprom shut down the pipeline indefinitely, citing an oil leak in one of its turbines.
EU officials believe the technical issues are merely a pretext by the Kremlin to shut down gas exports to the European Union
According to the West, Moscow is trying to impose an energy blockade on the EU at the beginning of the heating season in a last-ditch attempt to force EU to relax its sanctions against Russia.
At the same time, the Kremlin has blamed Western sanctions imposed on Russia for the pipeline's shutdown. Russia is claiming that sanctions prevent Gazprom from keeping the Nord Stream's turbines running.
On Saturday, Gazprom tried to alleviate EU concerns by stating that the company would increase natural gas exports to Europe via Ukraine.
However, the West has deemed Gazprom's promises to be unreliable. Such an increase would not fully compensate for the shutdown of Nord Stream.
Furthermore, this cannot be a permanent solution. Natural gas deliveries via Ukraine could be difficult due to the ongoing conflict between the two countries.
This escalation of the gas war between Russia and the EU is forcing EU policymakers to seek solutions for the supply problem.
The EU is worried that the shutdown of Nord Stream could send natural gas prices in Europe even higher.
On Friday, EU energy ministers are set to present emergency measures to tackle rising energy prices.
These measures would likely include natural gas price caps.
Furthermore, EU politicians would push for a reduction in gas demand and consumption in the European Union.
The ongoing energy crisis will be in the headlines this week, dimming the short-term prospects of the euro.
As the gas conflict escalates, risks of an economic slowdown would rise. With the ECB preparing for another interest rate increase, the timing for these risks could not be worse.
The ECB's policy meeting is scheduled to take place on Thursday. The EU regulator is now increasingly expected to carry out more aggressive policy measures after inflation in the eurozone reached 9.1%.
However, with the EU facing a renewed threat of an energy collapse, recession, and a serious financial crisis, many analysts do not believe that ECB president Christine Lagarde will take a more hawkish step than in July.
Earlier, the European Central Bank increased the key rate by 50 basis points to 0.5%. At the same time, the Federal Reserve hiked the rate by 75 basis points to 2.25-2.5%.
The gap between EU and US interest rates could likely increase even further in September, as traders expect another 75 bps move by the Fed in September. It would be a third such increase in a row.
"Everything is pointing to a lower euro," Carol Kong, senior associate for international economics and currency strategy at Commonwealth Bank of Australia said. "We've heard a great deal of negative news about the European economy, and I think the decline in the euro can continue this week."
On the technical side, EUR/USD bears hold dominance in the market. The 7-week support line at 0.9880 is acting as an additional downside filter for the pair.
EUR/USD must regain 1.0100 for bullish traders to return to the market.
