The difficult European macroeconomic climate is reflected in a variety of indicators. Over the past few weeks, this has been reflected in the successive comments on the euro/dollar pair. Analysts fear that the fall in the euro’s value against the dollar will lead to a situation of parity between the two currencies, which will put pressure on the European single currency.

At midday on 11 July 2022, the euro was trading at around $1.0130, its lowest level ever. This is even lower than on 16 December when the euro fell to $1.0515. Over the last 12 months alone, the euro has depreciated by 14.54% against the US dollar.

The depreciation trend is even more worrying as it shows all the signs of accelerating. Between 5 and 7 July, the euro fell by 1.5% against the greenback. A jump that did not go unnoticed. “The 1.5% one-day drop in euro/dollar is relatively large by historical standards but is especially dramatic given the levels the currency is now trading at and the fact that it occurred in such a light data session with no specific catalyst. However, as markets priced a weaker eurozone growth profile and reduced bets on ECB rate hikes across the curve, European energy benchmarks continued to grind higher,” commented Simon Harvey, head of FX analysis at Monex Europe.

Eurozone weaknesses

One of the reasons for the euro’s devaluation is the rather negative economic data for the European economy. Unsurprisingly, eurozone countries are seeing a widening economic health gap with the US due to their dependence on Russian raw materials and energy. Moreover, it is not new that forex investors tend to abandon the euro in favour of the dollar, seen as a safe haven, at the first sign of a market storm preceded by macroeconomic headwinds.

At the central bank level, the US Federal Reserve has been quicker than the European Central Bank to curb inflation. The result is a US monetary policy that supports the dollar. The ECB, on the other hand, has less flexibility than the Fed because of the ‘fragmentation’ of the euro area, which has large inflation differentials between its members. For example, on 1 July, the average inflation rate in the euro area was 8.6%, but was 6.5% in Malta and 22% in Estonia.

With the weakness in the single currency only set to exacerbate the stagflation environment in the eurozone, we believe the ECB may intervene in the coming days by moving its forward guidance for the July meeting to 50bp should further euro depreciation occur.

Simon Harvey, head of FX analysis, Monex Europe

With Eurozone inflation being driven primarily by energy price inflation, increasing the risk of recession every day, Harvey noted: “Markets will be paying close attention to developments in the eurozone’s energy developments, and what it will mean for the economy’s production potential heading into the winter months, when trading European assets.”

A risk of parity

Although the European currency is still trading above parity with the dollar for the time being, Harvey could not rule out a further deterioration in the rate: “Should the situation deteriorate further to the level where production constraints are imposed on German manufacturing, euro/dollar may drop to parity. With the weakness in the single currency only set to exacerbate the stagflation environment in the eurozone, we believe the ECB may intervene in the coming days by moving its forward guidance for the July meeting to 50bp should further euro depreciation occur.”

ING’s forex analysts are not closing the door on a worst-case scenario where the euro/dollar pair would break through parity and fall to 0.9545 in the July-August period.

Pending any monetary policy intervention, European consumers and businesses are looking to their wallets as imports from across the Atlantic have become more expensive. The good news for European exports to the US, however, is that for the time being, they are in favour of European traders. The same is true for European investors holding US assets, which are therefore gaining in value.

In the daily life of households and companies, the most critical consequence of the euro’s depreciation remains the price of oil, denominated in dollars, which is stuck in an upward inertia.

This article was published for the Paperjam + Delano Finance newsletter, the weekly source for financial news in Luxembourg.. Read the original French version of this article on .