Germany: Recession Caused By The Concerns Around Gas? ECB's Reponses To Others Have Been "Unhurried"

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EURUSD is in the center of attention today since after a months-long drop, the euro is nearing parity with the US dollar. It was almost 20 years ago when the main currency pair traded at 1.00 for the last time. What are the reasons for the euro underperformance? On one hand, implications of the Russia-Ukraine war play a big role.

Energy prices

 

Energy prices in Europe spiked as gas flows were being limited and now there is a real risk of complete halt to gas supply from Russia as tensions continue to escalate and after the "temporary" shutdown of Nordstream 1. This would most likely lead to a recession on the continent, especially in gas-dependent countries like Germany. Another reason for the weak performance of the common currency is the European Central Bank, which has been very slow compared to other major central banks when it comes to policy tightening and is yet to deliver its first rate hike.

Fed

Meanwhile, the Fed embarked on an aggressive rate hike cycle in an attempt to contain rampant inflation, providing support for the US dollar, which is also benefiting from safe haven flows. As a result, EURUSD keeps moving lower. However, traders should expect some support around the 1.00 area due to the psychological nature of this level which could lead to some efforts from buyers.

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Walid Koudmani

Market Analyst working in UK-Italian-Arabic markets covering a broad range of assets including stocks, commodities, FX and crypto. English, Italian and Arabic Speaker with a B.A in Business Management. Quoted in many prestigious publications including the Guardian, Barrons and Lefigaro and winner of bloomberg top forecast rank Q-2/Q-3 2020.