Divergent expectations for inflation and interest rates between the eurozone and the US from last year continue in 2022.
The European Central Bank surprised markets mid July when it increased interest rates by 50 basis points, the first rise in over a decade.
Due to the Eurozone’s reliance on gas from Russia, the euro remains vulnerable with USD/EUR at a 20-year High at parity in August, whereas it had been 0.87 in early February before the start of Putin’s so called Russian ‘special miliary operation’ in Ukraine.
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The Euro surged 2.5 percent in early February after the Bank of England raised rates again and the ECB look to be not too far behind.
Before this the Ukrainian crisis and its risks for European energy supplies had pushed the euro down towards 18 month lows of 1.12 against the US dollar.
For the euro 2021 was a poor year against the greenback. At the start of last year EUR/USD was at the 1.2200 level ($1=.82€) but by June was being solidly sold off eventually finishing at 1.1300 by year end ($1=.89€).
But to be fair, the market’s expectation for a rise in US inflation and thus interest rates has pushed up the USD exchange rate against most currencies.
Major banks are forecasting the eurozone common currency to fall to $0.95 by the end of the year.
This multi-year low for the euro vs the US dollar looks only to worsen as winter approaches; the short term news for the single currency is all negative.
The strength of the US dollar looks likely to continue when, at the annual Jackson Hole central banker’s getaway, Reserve Chair Jerome Powell said that the US central bank will ‘keep at it’ and is likely to keep raising interest rates to battle surging inflation.
A clear reflection of this is that the US Dollar index (measure of the USD strength against basket of currencies) is approaching 20 year highs.
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