Defense of parity – for now. The EUR-USD exchange rate approached the 1.00 level, but did not break it. Today’s publication of US inflation data will probably bring another attempt to bring the exchange rate below 1.00. Markets as a whole do not currently find a clear direction between fears of inflation and fears of recession.
Yesterday it was examined through a magnifying glass whether EUR-USD rate fell below parity in the morning or not. The impulse for such a price move could have been the extremely poor readings from the ZEW survey, but in the end only prices of 1.0000, not below, were confirmed. Weak data from the US should also contribute to a slight recovery in prices in the afternoon. The NFIB SME Confidence Index unexpectedly plunged almost four points. For the rest of the day the EUR / USD rate hovered between 1.0010 and 1.0075, this morning we see levels of 1.0040.
The sentiment data mentioned yesterday (ZEW and NFIB) were quite adequate to spread fears of recession give new food. This is visible in the markets after falling government bond yields, in quite weak equity markets and, above all, after a significant drop in oil prices. Brent fell from $ 107 / bbl to $ 99 / bbl in the day. And while there were signs of a reverse movement in the equity and bond markets, the price of crude oil remained at this low level until this morning.
Concerns about a recession are likely to wear off as the day goes on Concerns about inflation and interest rate hikes soft. In United States data on consumer prices published for the month of June. The inflation index is likely to experience a strong upward impulse, mainly due to soaring fuel prices during this time. Both the consensus and our forecast of houses predict a price hike of 1.1% MoM, which would raise the annual rate to a new high of 8.8%. In May, inflation was still 8.6%.
This number of inflation should be enough to support market expectations for another 75bp rate hike by the Fed later in the month. However, it is really about strengthening expectations, because in fact such a rate hike is already fully reflected in the money market curves. On the other hand, it means that the inflation data do not necessarily have to unbalance the US bond market – as long as the data on prices are released more or less in line with expectations. Yesterday, a fake inflation report was allegedly circulating on social media. The responsible statistical office (Bureau of Labor Statistics) felt even compelled to point out this fake in a statement.
Even if you get the impression that fears of a recession are dominating the market right now, it should be noted that concerns about inflation and interest rate hikes may come back. Central bank officials have not strayed a millimeter from their hawkish rhetoric so far, the European Central Bank will not start its interest rate hike cycle until the coming week, and the Fed is likely to make another strong hike a week later. For bond markets, this means that the risk of a yield rebound has not yet been mitigated. This can happen in particular if gas flow through Nord Stream 1 is resumed after the completion of maintenance work at the end of next week. Such a development of the situation would likely have an impact on the EUR-USD rate again. However, it’s still a few days, and the currency pair may have difficulties breaking the parity during this time …
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EUR-USD contribution: parity holds, but for how long? it first appeared on the onemarkets blog (HypoVereinsbank – UniCredit Bank AG).