Looming Recession Leads Euro to Bleak Territory

A recession is imminent in the Eurozone, and this economic event sees the euro peering over the cliff at US dollar parity.

 

The single European currency’s plummet to a five-year low rekindles the likelihood that the currency will reach equality versus the US dollar for the first-ever instance in 20 years.

 

We are interested in learning about this foreign exchange report today regarding the euro and the possible recession in Europe. We believe our readers will also gain some helpful insights with this news we are sharing with them.

 

According to the foreign exchange report posted online by global news outlet Reuters, an impending recession in the Eurozone has led to fears and encourages investors to pile on the bearish wagers.

 

Russia’s measure of stopping gas supply to Poland and Bulgaria is the latest blow to the euro, in which, at the time of writing, US$1 is equivalent to 0.95 euros, based on the foreign exchange information posted on Xe.com.

 

Germany and other European territories could be next in line for gas restrictions. Twin headwinds are already pressuring the euro.

 

They are the sweeping coronavirus or COVID-19-linked lockdowns in China, which is a leading market for bloc exports and a strengthening US dollar.

 

Information in Germany, the Eurozone’s largest economy, exhibited consumer morale at a historic low, and the government sharply cut its 2022 economic growth forecasts.

 

Moreover, a credit default swap index demonstrated the cost of insuring exposure to low-rated European debt is at its highest since 2020 and highlights the risks business organizations face.

 

The one-month euro/US dollar risk reversal is an options market measurement of demand for options on a currency falling or rising. Indeed, last Wednesday, April 27, it moved sharply to imply more euro weakness.

 

The call options’ ratio on the euro compared to puts nearly halved on Wednesday, from the previous day to minus 1.8, which is the lowest since early April of this year. Puts enable holders to sell, while call options confer the right to purchase an asset.

 

Since peaking at US$1.60 in 2008, the euro has moved steadily lower. This official currency of the 19 European Union countries comprising the Eurozone derived little benefit from expectations the European Central Bank or ECB may raise interest rates this 2021 by 80 basis points.

 

It is because markets are prepared for far more aggressive tightening from the US Federal Reserve System. Money markets are wagering US rates will increase by one percent in the next two meetings.

 

The ECB rates are presently -0.50 percent and will not rise to US levels this year or next year. Foreign currency traders will face some stiff technical barriers with a move to euro-US dollar parity seen as not going to be straightforward.

 

Two traders cited that sizeable option contracts around the early-2017 low of US$1.0340 guard euro downside. Then, the US$1.02-level last hit in December 2002.

 

Fast moves might also invite ECB intervention last witnessed in 2000 and 2011, especially if euro frailty sparks bond market blowouts in weaker countries like Italy.

 

Craig Inches is Royal London Asset Management’s head of rates. He remarked that finance professionals today are truly just talking about getting that deposit rate in the Eurozone out of the negative territory and perhaps back to slightly positive territory by this year’s end.

 

Inches explained that the European currency depreciates. He stressed the euro’s slump against trading partners’ currencies as worrying for bond investors as it can aggravate the bloc’s 7.4-percent inflation rate.

 

The asset management executive pointed out that a worsening inflation outlook due to currency weakness makes their firm evaluate that the value of bond yields is being compensated in longer-dated bonds for the future inflation risk and inherent term premia.

 

Inches added that 10-year German bonds made little sense at sub-1-percent yields. We agree that many geopolitical risks impact the euro nowadays.

 

We recommend our followers holding this single European currency regularly monitor the latest developments. In this manner, we believe they will be able to stay proactive in managing their euro units.

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