The EUR/USD has been steadily trading lower across the year. The pair kicked off 2022 at 1.1370, then rose to 1.1495 in early February, before falling to a low of 1.0350 on 13 May – levels last seen in January 2017.
From here, EUR/USD attempted to rebound, rising to 1.0650 at the beginning of June, before falling again and breaking parity with the US dollar on Wednesday, 13 July, marking a 20-year low.
As of 16 July 2022, EUR/USD is trading around the 1.0064 mark.
What has been driving the euro?
The euro has been steadily falling in recent months amid growing concerns over the health of the eurozone economy as inflation rose to a record high and growth slowed. Recent macro data shows that the eurozone economy is not doing so well.
Weakness in the eurozone economy is primarily driven by rampant inflation, and rising energy and borrowing costs. Inflation was already high at the start of the year owing to Covid-19 supply chain disruptions and mismatched supply and demand coming out of lockdowns. As a result of the Russian invasion of Ukraine in February and Western sanctions on Moscow, food, fuel and energy prices have surged.
Inflation, as measured by consumer prices, ia expected to rise to a record 8.6% year-over-year (YOY) in June – up from 8.1% in May. Energy prices have been a major contributor to the rise in inflation. Fears that Russia is on the brink of cutting gas supply to parts of Europe, including Germany, have sent gas prices higher, fueling recession fears.
Should gas from Russia be cut or supplies to Germany slowed considerably, flows to industry would be reduced or cut first. This would quickly send Germany into recession. Given the still elevated tensions between Europe and Russia over natural gas supplies, worries over gas supply are unlikely to improve anytime soon.
The latest GDP figures for the eurozone showed solid growth in the first quarter of the year of 0.5% quarter-over-quarter (QOQ), up from 0.2% in the final quarter of 2021. However, the more timely purchasing managers index (PMI) reflects the slowdown in business activity in recent months. The June composite PMI fell to 52 from 54.8 in May. The figure 50 separates expansion from contraction.
On 14 July, the European Commission confirmed that it now predicts growth of 2.6% this year for the 19-country currency bloc – just below the 2.7% it had previously forecast in May. The growth for next year, however, is now forecast to be 1.4%, instead of the 2.3% previously estimated.
For the 27-country European Union, the growth forecast was unchanged at 2.7% in 2022, but revised down 0.8% to total 1.5% in 2023.
https://capital.com/euro-forecast