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European Financial Markets

EUR/USD breaks 20-year low

Big news in the markets as major stock indices come under pressure and the EUR/USD has dipped under the 1.03 mark for the first time in 20 years on 5 July.

It is now getting remarkably close to the EUR/USD parity level that some investors have predicted for a decade. This parity last occurred in 2002.

A gloomy outlook on international markets has pushed the Euro down. In addition, the war in Ukraine, soaring energy costs, global supply chain problems and high inflation have also exerted pressure on the currency.

The Euro is being hit by the ongoing crisis, especially the war in Ukraine, in such a disproportionate way as Ukraine is situated close to Western Europe.

These countries are highly depended on Russian raw materials, such as oil or natural gas, but also many other products that are important for the food supply chain. For example, the European price of natural gas recently rose to a four-month high due to fears of increasing shortages.

The USD is proving strong and has regained its title as a crisis currency. Investors value the dollar as a safe investment. They also like the liquidity of the USD as it is backed by the sheer scale of the gigantic US financial market.

The USD has not only strengthened against the EUR but also against many other currencies, such as the Japanese Yen (JPY), British Pound (GBP) or Turkish Lira (TYR).

Interest rates are one of the most important value drivers for currencies. The European Central Bank (ECB) is under pressure from analysts for not being decisive enough in its monetary policy. In contrast, the US central bank has already raised its key interest rate several times significantly, similar to the Bank of England.

However, the ECB has so far only made one announcement in July, as it increased its key interest rate by 25 basis points. Even the Australian Central bank has raised its interest rate higher, up 50 basis points to 1.35 percent.

The ECB has the potential to surprise the markets with a more decisive monetary policy.

It appears the ECB President Christine Lagarde has lost investor trust in her role as the guardian of the Euro. For a long time, she was convinced that the inflationary pressures would only be temporary. To reverse the trend, it is vital for her to regain trust from the capital markets.

With inflation and geopolitical situation eroding the value of the European currency, could this potential crisis be what’s needed to finally justify a tighter central bank policy in Europe?

It is important to keep an eye out for any unscheduled announcements from the ECB prior to the next monetary policy meeting on 21 July.

A shift to a more decisive monetary policy by the ECB could slow down or even reverse this Euro downtrend. The question is, will the ECB take that action in time?

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