Euro falls below parity with US dollar, pound slips as energy prices surge

Philip McHugh August 30th 2022 - 3 minute read

The euro fell below parity with the US dollar last Monday, hitting a fresh 22-year low, where it languished for most of the week.

While most of the key currencies traded sideways for much of last week’s trade, the US dollar finished marginally higher than many of its counterparts.

The pound is weakening so far this week, with GBP/EUR slipping below €1.17 and GBP/USD wavering around US$1.17.

Looking ahead, the latest flash inflation figures from the Eurozone could boost EUR if it prints above expectations. Across the Atlantic, the jobs data on Friday is in focus for USD investors.

Pound pressured as UK energy crisis deepens

UK economic worries subdued the pound at the start of last week. Eight days of strike action started at the country’s largest container port while new forecasts see UK inflation hitting 18.6% in January, far higher than previous forecasts.

Sterling wavered higher on Tuesday as the UK’s flash PMIs came in stronger than the US and eurozone surveys. In particular, the country’s vital service sector performed better than expected.

GBP wobbled once again on Wednesday. While Bank of England (BoE) rate hike bets initially supported Sterling, worries about surging energy prices and ongoing strike action capped any upside.

Energy prices continued to climb through the week, prompting further losses as industry sounded the alarm over carbon dioxide shortages. CF Industries – one of the UK’s largest producers of the gas – said it would have to pause production due to rising costs.

On Friday, Ofgem announced the new energy price cap, which will rise 80% from October. Sterling subsequently weakened against its stronger peers.

So far this week, GBP has dropped to fresh lows. As the Tory leadership contest enters its final weeks, markets are seemingly worried about the approach frontrunner Liz Truss may take in the likely event she becomes prime minister.

UK data is thin on the ground, so politics could continue to impact Sterling. If the government reveals any new policy measures to tackle the worryingly high surge in energy bills this winter, the pound could find support.

Otherwise, troubling headlines about the UK economy and any further rises in gas prices may pressure GBP.

Euro recovers on ECB rate hike rumours

The euro suffered a sell-off early last week as Gazprom announced further disruption to gas supplies via the Nord Stream pipeline, sending EU energy prices to record highs.

Lacklustre PMI results left EUR without a clear direction as the week went on. The composite Eurozone PMI printed marginally above forecasts but private sector activity remained in contraction.

Anxiety over Europe’s energy crisis kept EUR under pressure for most of the week, while some fluctuations in the US dollar introduced volatility thanks to the currencies’ negative correlation.

However, Friday saw the single currency strengthen amid European Central Bank (ECB) rate hike bets. Reports suggest that some ECB policymakers may argue for a 75-bp interest rate rise at the bank’s next meeting.

Looking ahead, the August flash inflation figures for the Eurozone is the key event on the calendar for EUR investors. If it exceeds forecasts it could boost rate rise expectations, thereby lifting EUR.

The bloc’s July unemployment rate could also support the euro. Economists expect it to hold at a historic low of 6.6%.

US dollar upside limited by disappointing data

The US dollar started the week on a strong footing as a risk-off market mood increased the safe-haven currency’s appeal.

The ‘greenback’ then plunged after the US PMIs revealed that business activity slumped to a 27-month low, thereby dampening Federal Reserve rate rise bets.

After recouping some of its losses overnight, USD faced another setback as US durable goods orders unexpectedly stalled, adding to a downbeat outlook for the US economy.

Better-than-forecast GDP growth and corporate profits helped lift the US dollar on Thursday. However, investors seemed hesitant ahead of an important speech from Fed Chair Jerome Powell, which capped USD’s gains.

The US dollar then experienced volatility at the end of the week. US data came in mixed, and Powell struck a balanced tone. The Fed chief said that the pace of hikes may slow, but that restrictive conditions may remain in place for quite some time.

Turning to this week, a number of Fed speeches could impact USD. Any further indications that the US central bank will continue hiking rates will likely lift the ‘greenback’.

Friday brings the latest non-farm payroll report and unemployment data. If the US labour market remains strong, the US dollar could climb.

Australian dollar boosted by Chinese fiscal stimulus

The Australian dollar gained ground early last week after the People’s Bank of China (PBoC) cut its loan prime rates in an effort to boost the country’s economy. As Australia’s economy is intertwined with China’s, this news supported AUD.

Beijing also announced a $146tn fiscal stimulus package, adding further momentum to the ‘Aussie’ dollar’s rally in mid-week trade.

However, risk appetite soured somewhat towards the end of the week, trimming AUD’s gains.

This week, the latest manufacturing data out of China could impact the ‘Aussie’. If Chinese factory activity remains subdued, AUD could slip.

Meanwhile, market mood will likely drive movement in the risk-sensitive Australian dollar.

Written by
Philip McHugh

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