EUR/USD: Reasons why the euro is heading to parity

By:
on Jul 6, 2022
  • The EUR/USD has been in a freefall in the past few months.
  • The pair has fallen by 17% from its 2021 highs.
  • The pair will likely keep falling to the parity level.

The EUR/USD pair continued its freefall as worries about the European economy continued. The euro dropped to a low of 1.0180, which was the lowest level since 2002. The currency has plummeted by more than 10% since Russia invaded Ukraine. It has also fallen by over 17% from its highest level in 2021.

Why is the euro crashing?

There are several reasons why the EUR/USD pair is in a freefall. First, the bloc’s economy has been hurt more than Russia during the crisis in Ukraine. That’s because the bloc relies mostly on Russia. 

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For example, the bloc buys most of its energy from Russia. At the same time, its auto industry relies mostly on Russian metals like steel, platinum, and palladium. Therefore, while the bloc has punished Russia, it seems like the latter is winning. 

Russia has already found alternative markets for its oil and is now punishing the region by reducing the amount of natural gas it sends. Further, Russia has forced these countries to adopt the rouble for gas purchases. 

Second, in line with this, many European countries are now struggling since they have grown over-reliant on cheap Russian energy. Indeed, Germany is now considering providing billions of dollars to companies affected by the crisis. 

Therefore, there are concerns about whether companies like BMW and Volkswagen will survive as their energy costs rise. On Monday, data from Germany showed that the country recorded its first monthly deficit in decades, 

Another euro crisis

The EUR/USD pair is also crashing as investors price in another euro crisis because of the actions of the European Central Bank (ECB).

The ECB decided to leave interest rates unchanged in its June meeting. It then decided to end its quantitative easing (QE) policy. In the aftermath, a crisis in the bond market forced the bank to reconsider some of these policies.

Therefore, the worry is that the bank will struggle to hike interest rates in the near term. Officials have priced in a 0.25% or a 0.50% rate hike next week. Doing so risks pummeling the bloc into a deep recession that will be difficult to get out. 

Finally, the EURUSD price is crashing as investors move to the safety of the US dollar. Investors, individuals, and businesses have moved to the safety of the greenback as recession risks rise. These risks explain why natural gas and crude oil prices have retreated recently.

Further, the hawkish statement by the Fed has made many investors move from the low-yielding European bonds to US ones.

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