Last week, the euro hit a 20-year low against the dollar and fell below parity once again after its first dip below parity in over two decades on July 14, 2022. The single currency’s second trip below parity was primarily driven by the strong dollar and the many challenges facing the eurozone economy. According to the latest ECB meeting minutes, which did not disclose a clear hawkish or dovish position, the market continues to expect a 50 basis point interest rate hike at the ECB Governing Council’s next meeting. Ahead of the annual meeting of global central bankers over the weekend, Fed Chairman Jerome Powell issued hawkish comments, raising investor expectations for a 75 basis point hike in U.S. interest rates in September.
This week, the Euro area will welcome the latest inflation reports, including the German August preliminary CPI report on Tuesday, the Euro area August inflation report on Wednesday, and the Euro area July PPI on Friday, which may further impact the interest rate decisions at the ECB’s next meeting in September.
Data in July showed that the German CPI rose 8.5% year-on-year, beating consensus expectations of 8.1% and the previous value of 8.3%. The July data showed that the June data was only a short-term cooling, and inflation pressures in the "European economic locomotive" have not eased. Therefore, the markets expect the European Central Bank to further increase the pace of monetary tightening.
It is hard to say, but even if the latest data indicates a slow down from a record high, inflation in the eurozone has not reached an inflexion point, nor has it peaked. Because of the upcoming winter season, energy demand is bound to skyrocket amid tight gas and crude oil supplies. The EU's total ban on energy imports from Russia is expected to come into effect in December, yet the region is struggling to find other suppliers. The European Union’s goal is to ensure that Europe will stop importing Russian oil and gas by the end of this year, which is a massive task. Whether or not this goal is achieved, it is inevitable that the tight energy supply situation, coupled with the surge in demand due to weather factors, is bound to push up energy prices, triggering a surge in the cost of living.
However, suppose the latest inflation data due this week shows that overall inflation in the Eurozone cooled as expected in August. In that case, it could temporarily ease the pressure on the European Central Bank to execute a larger rate hike. However, as much as investors pay attention to the latest inflation reports, the non-farm employment situation in the United States is also a key focus this week. The markets will use these prints to estimate how much the Fed will raise interest rates in September. If the US job market remains strong enough to support a 75-bps rate hike by the Federal Reserve in September, we could see the dollar strengthen. On the other hand, the European Central Bank’s rate hikes are underwhelming, which means that the euro will likely remain under significant downward pressure.
From a technical point of view, the EUR/USD is still hovering at the parity level of 1.0. As long as this level is still not effectively superseded, the downward pressure on the exchange rate will remain difficult to change. Hence, the pair may even retest the 0.99 or the 0.98 levels. Unless the US dollar also encounters resistance above the 109 mark, which could provide breathing space for the euro. After the pair returns to 1.0, we could gradually rise to 1.0235, which is also the intersection of the daily 50 moving average and Fibonacci levels.