Euro drops to a new two-decade low as Russia shuts natural gas deliveries

By:
on Sep 5, 2022
  • Russia shuts natural gas deliveries to Europe, and the common currency tanks
  • European stock market indices opened the week in the red
  • The common currency dropped to a two-decade low against the US dollar

This is an important week for euro traders because the European Central Bank (ECB) presents its monetary policy on Thursday. A rate hike is on the table, with most market participants expecting the central bank to raise the key interest rates by 75bp.

But as bullish as it may be for the common currency, bulls woke up this morning squeezed. The euro opened the trading week sharply lower, trading below 0.99 against the US  dollar for the first time in twenty years.

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The news that Russia has shut down completely its natural gas deliveries to Europe tanked the common currency. As summer comes to a close, Europe is pressured by Russia to lift sanctions if it wants natural gas to heat homes during the winter.

European stocks opened sharply lower

The common currency dropped on the news and the main European bourses too. For instance, the Spanish index, Ibex, lost more than -1.5% on the news.

Also, the German Dax index trades sharply lower, down close to -3% at the time this article was written. Moreover, the French CAC 40 index lost about -2%, and even the FTSE 100 is down a couple of percentage points.

The war in Ukraine weighs on European economies, and there are no signs that it will end anytime soon.

Natural gas prices jumped on the news

The news triggered a sharp move in natural gas prices. For instance, the Dutch TTF gas futures rose by 30%, making it complicated for the ECB to set the right monetary policy.

Because the rise in the price of natural gas affects industries, it will fuel inflation. Thus, with the inflation outlook uncertain, any attempt by the ECB to come closer to its mandate of price stability looks in vain.

EUR/USD dropped below 0.99

The EUR/USD exchange rate is closely watched by all market participants. It dropped below parity this year, and earlier today it moved below 0.99.

This is a two-decade low for the common currency, and there are no prospects of a reversal. The chart above shows how the EUR/USD fell from above 1.20 in a straight line, without any meaningful bounce.

As such, the trend will likely continue despite the ECB’s efforts to contain the damage.

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