Euro nears parity with the dollar
Russia’s threat to turn off gas supplies to Europe saw the euro plummet this morning, meaning it stood at near parity to the US dollar.
It is almost 20-years ago that the EURUSD currency pair traded at 1.00.
Walid Koudmani, chief market analyst at XTB, explained that energy prices in Europe spiked as gas flows were limited, but a complete halt to gas supply from Russia “would most likely lead to a recession on the continent”.
Koudmani said another reason for the weak performance of the common currency is the European Central Bank “which has been very slow compared to other major central banks when it comes to policy tightening and is yet to deliver its first rate hike”.
Meanwhile, the Fed has undertaken an aggressive rate hike cycle to contain “rampant inflation” which has supported the US dollar.
“As a result, EURUSD keeps moving lower. However, traders should expect some support around 1.00 area due to the psychological nature of this level which could lead to some efforts from buyers,” he said.
Koudmani said there are several reasons why the EURUSD situation affects UK investors and savers.
“It is most directly related to the fact that much of this decline in the pair is driven by USD strength which has also reflected on the GBPUSD pair, which recently has been hovering around 1.18,” he said.
He added: “Importing goods from the US is becoming increasingly expensive and the prospect of economic decline in Europe and the UK, exacerbated by the Russia-Ukraine conflict and supply shortages, will definitely pose a threat to the general situation the average consumer is facing along with the cost-of-living crisis.
But he said that on a positive note, “it might encourage some tourism from the US” as the foreign exchange rate has become significantly more favourable than it was in the past.
“But with the economic difficulties being faced by average consumers and travel issues, that factor may not be of much relevance in the short-term,” he added.