12.07.202207:31 Forex Analysis & Reviews: The euro is in a deep depression. Is it a dead end?

The European currency is frantically looking for a way out of the current situation, when the decline persists, and parity with the dollar looms on the horizon. At the same time, the US currency remains in an upward trend, fueled by the interest of investors seeking to withdraw into the USD amid the possible onset of a recession.

At the beginning of trading on Tuesday, July 12, the euro was balancing near a 20-year low, steadily approaching parity with the dollar. Experts believe that the main reason for this phenomenon is the growing fears about the energy crisis, which can plunge Europe into recession. Against this background, the actions of the Federal Reserve, which continues to aggressively tighten the monetary policy in order to curb inflation, contrast sharply with the indecisiveness of the European Central Bank.

According to Trading Economics analysts, the euro has updated its low against the greenback over the past 20 years. The single currency lost about 1.2% on Monday, July 11, dropping to 1.0067. In the future, the fall continued. On the morning of Tuesday, July 12, the EUR/USD pair was trading at 1.0011, breaking another anti-record.

The euro reached new lows on Monday, remaining under pressure against the dollar. According to preliminary estimates, the strengthening of the euro is unlikely in the second half of 2022, since the European economy may suffer a technical recession. According to analysts of the National Bank of Canada, in the near future, the euro will remain "at a level close to the bottom."

The improvement of the situation for EUR is possible with the stabilization of energy prices, experts are certain. Currently, the single currency is suffering from a sharp rise in energy prices. The situation is complicated by the geopolitical conflict in Eastern Europe and rising inflation in the eurozone. These factors are steadily pushing the euro to parity with the dollar, that is, to the level of 1.0100.

The second half of 2022 does not imply the formation of conditions suitable for strengthening the euro. According to experts, the European economy is closer than ever to a burst of technical recession. In the near future, the EUR will remain at a low level, analysts summarize.

Against this background, the US currency is strengthening its position, overtaking its rival in the EUR/USD pair and bringing the probability of parity closer. On Wednesday, July 13, the markets are expecting reports for June on inflation in the US and Germany. According to analysts, annual inflation in Germany slowed to 7.6% in June (from the previous 7.9%). As for the preliminary calculations about the United States, last month consumer prices increased by 8.8% year-on-year. Recall that this figure was 8.6% in May.

Confirmation of this scenario means that inflation in the US remains at the highest level in the last 40 years. At the same time, a weaker consumer price index will slow down the potential fall of the EUR/USD pair to parity. However, a postponement is possible only until the European Central Bank decides on the rate, that is, until the meeting next Thursday, July 21.

Most analysts agree that further acceleration of inflation contributes to an increase in the key rate in the United States (by another 75 bps). At the same time, decisive action is also likely from the ECB, which is prone to procrastination in this matter. The course of tightening monetary policy taken by the Fed will provide additional support to the greenback and increase pressure on the euro.