EURUSD Breaches Below Parity, Lowest Level Since December 2002

23 Aug 2022

After dipping below parity on 14 July 2022, the EURUSD rebounded to as high as 1.036 before selling pressure sent the pair to a fresh 20-year low. The US Dollar Index (DXY), which gauges the strength of the greenback against a basket of rival currencies, had also been trending higher since 12 August and recently hit the highest point since September 2002, at 109.27. The steep decline in the EURUSD pair may be largely attributed to the hawkish Federal Reserve as well as concerns over a recession in the Eurozone.

Fed maintains hawkish stance to bring down inflation

Despite the US Consumer Price Index (CPI) easing slightly to 8.5% in July 2022 from 9.1% in June, inflation in the US remains largely elevated above the Fed’s target at 2%. According to the July FOMC meeting minutes, Federal Reserve officials are determined to bring down inflation and are not likely to consider pulling back on interest rate hikes until inflation eases to their desired level. A hawkish Fed tends to benefit the greenback.

Amid the global economic uncertainty, the US Dollar safe haven status also helped to push the US Dollar higher against other currencies.

Recession fears in EU

Another factor that weighed on the EURUSD is the announcement of an unscheduled maintenance work on the Nord Stream 1 pipeline, which is the biggest gas infrastructure that helps to deliver Russian gas to Germany. Gas flows via the Nord Stream 1 pipeline will be suspended for three days from 31 August to 2 September 2022. In recent weeks, the gas supply via the pipeline has been operating at just 20% of the agreed volume. While Russia claims that the drop in supply is caused by faulty equipment, Germany considers it to be a political move in retaliation to the EU. As Germany imports more than half of its gas from Russia, the risk of a cut in gas supply will have a great impact on it’s economy and would also threaten to send inflation even higher.

As the recession fears in the EU rises, the EURUSD depreciates as safe haven flow reinforces the greenback’s strength.

Technical Analysis

EURUSD has broken a new low as it continues the formidable downtrend in a falling channel. The technical setup for the pair remains largely bearish as it was rejected off the upper resistance of the falling channel on 12 August 2022. The Relative Strength Index (RSI) validates the bearish momentum with a reading near the oversold level at 31. Though, a bullish divergence on the RSI would signal caution as it may suggest a bullish reversal.

Looking ahead, we anticipate that the pair would extend further decline to test 0.986 (S1), which is a support last visited in December 2002. If prices pierce below this level, the subsequent technical target would be at 0.97 (S2). In the alternate scenario of a bullish rebound, parity level at 1.00 (S1) and 0.97 (S2) would pose resistance for EURUSD.

Tuesday, August 23

EUR – ECB’s Panetta speech, Consumer Confidence (Aug)

USD – S&P Global Composite PMI(Aug), S&P Global Manufacturing PMI(Aug), S&P Global Services PMI(Aug), New Home Sales (MoM)(Jul)

Wednesday, August 24

EUR – Germany 10-y Bond Auction

USD – Durable Goods Orders(Jul), Durable Goods Orders ex Defense(Jul), Durable Goods Orders ex Transportation(Jul), Nondefense Capital Goods Orders ex Aircraft(Jul), Pending Home Sales (MoM)(Jul)

Thursday, August 25

EUR – Germany Gross Domestic Product (QoQ)(YoY)(Q2), Germany IFO – Business Climate(Aug), Germany IFO – Current Assessment(Aug), Germany IFO – Expectations(Aug), ECB Monetary Policy Meeting Accounts

USD – Core Personal Consumption Expenditures (QoQ)(Q2), Gross Domestic Product Annualized(Q2), Gross Domestic Product Price Index(Q2), Initial Jobless Claims(Aug 19), Personal Consumption Expenditures Prices (QoQ)(Q2), Jackson Hole Symposium

Friday, August 26

EUR – Germany Gfk Consumer Confidence Survey(Sep)

USD – Core Personal Consumption Expenditures – Price Index (MoM)(YoY)(Jul), Personal Income (MoM)(Jul), Personal Spending(Jul), Fed’s Chair Powell speech, Jackson Hole Symposium, Michigan Consumer Sentiment Index(Aug)

Saturday, August 27

USD – Jackson Hole Symposium

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