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The euro is at parity with the dollar. Why it happened and what it means for the economy

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For the first time in 20 years, the euro has fallen to exactly one dollar. This was preceded by serious crisis phenomena in the European and American economies, and the change in exchange rates may be a consequence of a different response to the same crisis. 

Why is the Euro falling?

At the moment, the euro is one step away from parity with the dollar – it costs about $1.0005 on world markets. The rate of 1 dollar to 1 euro has in fact already been reached.

The reasons for this are to be looked for from both sides – from the weakening of the euro and from the strengthening of the dollar:

  • The dollar is rising on the back of the U.S. Federal Reserve’s tight monetary policy. The U.S. authorities are struggling with high inflation (it renews its highs every month), so the Fed is raising the interest rate at every next meeting. Higher interest rates make U.S. government securities more attractive to investors and this has a direct impact on the exchange rate. This is confirmed by the high value of the dollar index to other currencies (DXY);
  • The euro has no reason to strengthen. The European Central Bank’s key rate policy remains soft – currently at minus 0.5%. EU countries are waiting for the ECB to take steps to raise the rate in order to fight inflation, and the rate may reach 0.75% by the end of the year. But so far this is not happening; inflation in the Eurozone reaches 8.6% (just like in the US), and the European economy is suffering from high energy prices.

Simply put, the reason for near parity is that the U.S. Fed is fighting inflation harder than the ECB. But the U.S. government debt service will become much more expensive for U.S. authorities, while European countries can still avoid unnecessary spending.

Among the reasons, experts call the current balance of foreign trade: EU countries have a negative (deficit of up to 1 trillion Euros) while the U.S. has a surplus.

What will be the consequences?

Among the obvious consequences of the weakening of the euro for the eurozone countries is the continued fall of the currency, a further increase in inflation, which will affect the standard of living in EU countries. 

Experts predict the growth of tensions and economic problems in European countries:

  • Today, achieved currency parity will not cause any significant consequences for the European economy. A fall below parity will signal the inevitable consequences of the energy crisis and the inevitable recession in the Eurozone. For U.S. companies, the weak euro means difficulties and problems with competitiveness in European markets.
  • For European companies, a weak euro increases inflationary pressures through the rise in the cost of key imported raw materials for Eurozone companies. Theoretically, the weaker euro should be good for European exporters. At the same time, there are significant problems with energy supply in the Eurozone. This constrains the development of the investment potential of European industry for export. In addition, the weak euro reduces the attractiveness of assets denominated in European currency. As a result, investors will focus their investments in the United States.


Forex

US recession and stock market. Thomas Barkin, Fed: Recession is virtually impossible

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us recession and stock market

The U.S. recession and the stock market are closely linked. The key U.S. stock market indices – Dow Jones, NASDAQ and S&P 500 – have resumed their growth, and this movement already raises a lot of questions. To remind you, the U.S. stock indices have been rising for several weeks in a row and even updated their previous local highs, recovering by 40-50% after falling in recent months. 

Thomas Barkin, one of the members of the Board of Governors of the Fed, said that inflation is declining because of the leveling of demand. He is probably referring to the core rate, which has really stopped rising. But the core continues to be at its highest level in 40 years, and we wouldn’t say at this time that inflation is slowing. 

On US recession news Barkin also said that inflation will not fall immediately, sharply or quickly, and that the Fed is unlikely to get help from supply chain fixes or other world events. He also noted that the U.S. economy is not in danger of a recession, and at this time there is only a slight slowdown in GDP growth, as a recession is not possible with 400,000 new jobs created each month (NonFarm Payrolls). 

In light of this statement and earlier statements from Powell and Yellen, Friday’s NonFarm Payrolls report becomes even more important than before. Recent reports have indeed shown the strength of the U.S. labor market, but what if Nonfarm Payrolls start to decline? What will the Fed members say then, how will the U.S. stock market move? We still believe that despite the strong upward correction, there is still a long way to go before the downtrend is over.



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Forex

Euro rate chart: the euro is not going into a trap

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usd to euro rate

No matter how much FOMC officials try to convince investors of the Fed’s commitment to aggressive tightening of monetary policy, so far the financial markets are not taking the Central Bank’s bait. How has this affected the euro rate chart? 

U.S. stock indices started rising again and hit a peak in the last two months. The reason for this is the expectation that the Fed will introduce new mechanisms to stop the fall. At the same time, there are no guarantees that the Fed will take drastic measures. Owing to the fact that the situation is ambiguous and nobody makes accurate forecasts, the EURUSD exchange rate constantly fluctuates in one direction. The pair cannot go beyond the consolidation range at 1.01-1.03.

USD to euro rate: what’s going on in the currency market?

Investors are hoping the report on the U.S. labor market in July will give some clarity. No one wants to get ahead of the curve before it is published. In such a situation in the past, one or several big players could provoke a false-break. Statistics were used to implement that idea. Now nobody wants to take risks. The Eurozone data does not lead to serious fluctuations in EURUSD.

In particular, the fact that German manufacturing orders have been declining for the fifth month in a row might have dealt a blow to the euro. However, the bulls in the main currency pair found it positive: in fact the index fell by 0.4% m/m against a forecast of -0.9%.

Meanwhile, consumer expectations for future inflation remain at elevated levels in the eurozone. Respondents expect gross domestic product to contract by 1.3% over the year and unemployment to rise to 11.5%. This is in stark contrast to the central bank’s forecasts. It does not expect a recession and sees the unemployment rate at 7% through 2024.

FOMC officials are 100% convinced that if monetary policy is tightened, the markets will start to fall. But this is a natural phenomenon. No one has canceled the market cycle. It’s a pattern. So we should not expect domestic consumption to decline and inflation to come to a complete halt.



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Forex

European stock market news: Europe started to lag behind the rise in U.S. stock prices

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european stock market news

Current European stock market news: U.S. stock futures rose slightly Friday, helped by tech stocks as investors prepare for the monthly U.S. jobs report, which is likely to revive the recession debate.

Futures on the Nasdaq 100 rose, signaling the underlying indicator could reach a 20% gain from its June low and meet the technical definition of a bull market. The S&P 500 futures were up modestly.

European stock market analysis

European equities were flat, but they started to lag their “American counterparts” and the daily candlesticks clearly show it. The Stoxx50 index is still undecided as media firms and insurers drag it down.

Investors are returning to defensive stocks, especially tech stocks, as falling bond yields make long-term assets more attractive. 

The global stock index is poised for a third weekly gain, and is approaching a two-month peak in recovery from bear market lows, helped by solid earnings at U.S. companies. 

U.S. jobs data on Friday is the next key point for the markets. Likely hiring, according to Anne Wong, Bloomberg Economics’ chief U.S. economist, things eased in July, but the labor market remains in line with a growing, not-recessionary, economy and the Fed will continue to raise rates.

Separately, Democrats agreed to a revised version of their tax and climate bill adding a new 1% excise tax on stock buybacks.



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