Euro remains pressured towards parity with dollar despite ECB

The big issue in Europe remains energy security which is why a return to parity is more likely than a rally to $1.04

O euro still moving towards parity with the dollarand not even a faster pace of rate hikes by the European Central Bank can change that, according to traders and market strategists.

The big issue in Europe remains energy security, which is why a return to par is more likely than a rally to $1.04, said Francesco Pesole, currency strategist at ING. Furthermore, the interest rate differential between Europe and the US still explains the weakness of the euro.

“The size of the ECB’s tightening cycle is very small compared to the Fed,” Pesole said. “You can’t say that this can boost the euro’s appreciation in an environment where the eurozone is at risk of running out of gas this winter.”

The euro fell about 1% to as low as $1.013 on Friday. Last week, the common currency was even traded at par with the dollar for the first time in 20 years.

O ECB raised its benchmark rate by 0.5 percentage point on Thursday, a bigger increase than many traders had expected. The market is also watching the political turmoil in Italy, with the country heading for a snap election, and whether Russian gas supplies will return to normal.

The ECB’s rate decision “reduces the speed/magnitude of the euro’s fall, but is unlikely to change the trajectory,” said Wells Fargo currency strategist Erik Nelson. “We expect the euro to trade as high as $0.95 in the coming months.”

Source: Bloomberg