Euro Falls Below Parity

Image © Pound Sterling Live

The Euro to Dollar exchange rate has fallen below parity amidst a surge in Dollar demand and the capitulation of buy orders around 1.0.

"It appears the euro buy orders around the parity level have all been filled triggering a wave of fresh sell signals in the process," says Neil Jones, head of institutional FX sales at Mizuho Bank.

"My sense is a potential shift to a 1% hike from the FED induced by recent CPI data overlaid by energy driven geo politics was sufficient to drive the USD higher," says Jones.

Above: EUR/USD at 15 minute intervals.

Looking at the developments that lead to the fall we can see stock markets are deep in the red as they anticipate an economy-strangling 100 basis point interest rate hike from the Federal Reserve towards the end of this month.

This will slow economic growth in the world's largest economy while raising the cost of money right across the globe.

As such, oil prices and other commodities are falling rapidly and reflecting recession expectations.

The Euro to Dollar exchange rate is quoted at 0.9964 at the time of writing, bank accounts are offering in the region of 0.9683 for dollar payments while independent providers are offering around 0.9930.

The Euro was under particular scrutiny as ongoing fears over the future of gas supplies from Russia intensified.

It was reported Gazprom warned a saga over a key gas turbine - in Canada for repairs - is far from over.

The turbine helps power the Nord Stream 1 pipeline, which is currently closed for repair.

Fears are that when the repair period ends on July 21 gas simply won't flow as Russian President shuts down supplies using a technical pretext.

The European TTF natural gas contract was higher by 4.7% as a result.

The equivalent UK contract was meanwhile down by around 6.0% as fears over Norwegian supply subsided, keeping the Pound bid against the Euro.

The Dollar has been supported ever since Wednesday's U.S. inflation print of 9.1%, which was higher than investors anticipated.

They immediately raised bets the Federal Reserve would be required to accelerate the pace it raises interest rates to slow the economy and cool inflation.

Of concern to economists is that core CPI - that bit of the inflation bucket that excludes fuel - is rising well above target, a problem that is firmly within the Fed's remit.

"Market participants concluded the Fed might raise interest rates by one percent at its next meeting in two weeks, a scenario that Fed funds futures currently assign a 55% probability to. In other words, a 100bps rate hike in July is now the baseline according to market pricing, and if the Fed doesn’t push back, it is essentially endorsing it," says Marios Hadjikyriacos, Senior Investment Analyst at XM.com.

Following the inflation data there was, indeed, very little appetite by a number of Federal Reserve board members to push back against the market.

Atlanta Federal Reserve Bank President Raphael Bostic said "everything is in play" when asked about a 100bps hike later this month. "Today’s numbers suggest the trajectory is not moving in a positive way... How much I need to adapt is really the next question."

San Francisco Federal Reserve Bank President Mary Daly told the New York Times she favours a 75bp hike, but 100bp would now be on the table given the inflation surprise.

Federal Reserve Bank of Cleveland President Loretta Mester told Bloomberg she was not willing to rule out a 100bp move.

"Certainty the inflation report suggests that there’s no reason to say that a smaller rate increase than we did last time, right, because nothing moved in that direction," she said.

Federal Reserve Bank of Richmond President Tom Barkin said inflation must occupy the Fed's full attention and that he wants to see positive real rates in the next few years.

"So now that we’ve had a strong NFP report and a surprising CPI result, is the coast clear for a 100bps hike from the Fed on July 29th? Of course it is," says Bipan Rai, North America Head, FX Strategy, at CIBC Capital.

"Long USD is where it's at," he adds.