Forex Market: Euro moves a step closer to parity with US Dollar, EU energy woes pressure single currency

The common currency extended losses against the US Dollar on Tuesday and came another step closer to parity due to concerns an EU energy crisis could drive local economies towards recession.

At the same time, the greenback continued to be underpinned by expectations of more aggressive interest rate hikes by the Federal Reserve compared to other central banks.

“Haven demand for USD, coupled with an upside surprise in last Friday’s payrolls release, likely contributed to the latest bout of dollar strength,” analysts at Maybank wrote in an investor note.

As a result, the EUR/USD pair remained pressured near a 20-year low and close to parity.

The largest single pipeline that delivers Russian gas to Germany, the Nord Stream 1, began annual maintenance on Monday. Gas flows will be discontinued for 10 days, but still, there are concerns the shutdown could be extended due to the military conflict in Ukraine.

“The most proximate concern for markets is whether or not Nord Stream 1 is going to come back online,” Bipan Rai, North American head of FX strategy at CIBC Capital Markets, was quoted as saying by Reuters.

If it does not, “the markets will likely price in a recession” for the region, Rai said.

Meanwhile, the Federal Reserve is expected to hike rates by 75 basis points at its policy meeting on July 26th-27th, as it seeks to curb high inflation.

Futures markets are now pricing for US interest rates to reach 3.50% by March 2023.

“The Fed is going to raise rates more aggressively than most other developed market central banks and we don’t think other developed market central banks really have the bandwidth to keep up,” CIBC Capital Markets’ Bipan Rai noted.

As of 8:18 GMT on Tuesday EUR/USD was edging down 0.35% to trade at 1.0003. Earlier in the European trading session, the major Forex pair slipped as low as 1.0002, which has been its weakest level since December 6th 2002 (1.00001).

EUR/USD has retreated 4.55% so far in July, following another 2.31% loss in June.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 1.0085
R1 – 1.0137
R2 – 1.0235
R3 – 1.0286
R4 – 1.0338

S1 – 0.9987
S2 – 0.9935
S3 – 0.9837
S4 – 0.9739