PARITY: EUR/USD parity is the biggest line-in-the-sand level in global FX markets. It has not been breached in twenty years. But the odds are increasingly stacked against the EUR, with its deteriorating relative fundamentals and still far from a ‘cheap’ valuation (see chart). A fall below 1.00 would stoke Europe’s imported inflation concern, but not be all bad news. It would also be important ‘growth insurance’ for many big exporters, from Airbus (AIR.PA) to ASML (ASML). Over 50% of European corporate sales come from abroad, versus only 30% for US companies.
EUR/USD. Currencies are a two-way street. The US dollar is being boosted by a Fed on the inflation-fighting front-foot that is driving a widening interest-rate differential with much of the developed world. Whilst rising global recession risks are seeing a ‘safer-haven’ US dollar bid. Meanwhile, the Euro is pressured by the ECB’s go-slow interest rate approach and the continent’s higher recession risks. This is worsened by the doubling of local gas prices in the past month.
NON-ACTION: European policymakers are stuck between a rock-and-a-hard-place, and likely to do no more than verbally intervene if the EUR falls below the symbolic 1.00. This weakness is being fundamentally driven, and the EUR is far from oversold. The inflation-adjusted level of the EUR against a basket of major global currencies shows it is only 10% cheaper than the long-term average. This is a far cry from the JPY, for example. Meanwhile, the US dollar seems strong but US policymakers are likely not yet ready for a 1985-style Plaza accord to weaken the US dollar.
