Selling pressure on the euro may lead the exchange rate of the main currency pair EUR/USD below the parity level. As a result, in the fourth week of August 2022, we may see levels from the end of 2002.
The most significant risk factor for the euro appears to be fear of recession. These may increase with rising electricity and natural gas prices. The consequent deepening of the energy crisis and the dim prospects for its resolution may negatively affect the European currency in the eyes of global investors.
The aforementioned natural gas prices seem to be approaching the record level of EUR 300 per megawatt hour. This could be a consequence of Russian energy giant Gazprom's announcement to shut down gas flow through Nord Stream 1 to Germany due to maintenance work at the end of August. Earlier, due to turbine problems, the gas flow was reduced to 20 percent. Electricity prices for next year's contracts are also breaking records. They have risen from €50 to €700 in just a few months.
The eurozone's economic woes seem to be confirmed by macroeconomic data. The August Global S&P PMI showed that business activity in the eurozone declined for the second month in a row, albeit less than expected. The S&P Global Eurozone Composite PMI fell to 49.2 in August from 49.9 in July, above market expectations of 49, the preliminary reading showed. The latest data showed a second consecutive decline in business activity across the eurozone after a 16-month period of growth. The overall decline in output was again driven by a contraction in the manufacturing sector, where output fell for the third consecutive month, according to the published data.
Germany posted its sharpest drop in output since June 2020, while activity in France fell for the first time in a year and a half. Investors are now awaiting the hawkish tone of Thursday's minutes from the European Central Bank's monetary policy meeting, as inflation in the eurozone still appears to be hitting record highs. Recall that the ECB surprised in July by raising interest rates by 50 basis points. The market can now expect two more increases of 50 basis points each at the September and October meetings.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
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