Euro teetering on edge of parity with US dollar over recession fears

A financial trader checks data on computer screens while a desktop television displays euro banknotes on the Frankfurt Stock Exchange in Frankfurt, Germany.

Martin Leissl | Bloomberg | Getty Images

The euro fluctuated close to parity with the US dollar on Tuesday as the euro-zone energy supply crisis and economic woes continue to weigh on the common currency.

The euro was trading 0.2% lower at about $1,002 during morning deals in London, offsetting previous losses that pushed the single currency towards parity with the dollar.

Fears of a recession have heightened in recent weeks amid growing uncertainty over the bloc’s energy supply, with Russia threatening to further cut gas flows to Germany and the wider continent.

Russia on Monday temporarily suspended gas deliveries through the Nord Stream 1 pipeline for annual maintenance work over the summer. The pipeline is Europe’s largest piece of gas import infrastructure, transporting approximately 55 billion cubic meters of gas annually from Russia to Germany via the Baltic Sea.

The planned 10-day suspension of gas flows has derailed fears of permanent supplies, potentially derailing winter supply preparations in the region and exacerbating a gas crisis.

“It’s an important and obvious psychological level that is highly threatened here,” Jeremy Stretch, head of G-10 FX strategy at CIBC Capital Market, told CNBC’s “Street Signs Europe” on Tuesday.

Stretch said the prospect of the euro falling below this level reflected growing fears of a recession in the euro-zone.

ECB in ‘very, very difficult position’

The prospect of a stronger economic slowdown has also cast doubt on whether the European Central Bank will be able to tighten monetary policy aggressively enough to contain record high inflation without adding to the economic pain.

“The ECB is in a very, very difficult position. You could argue that the ECB has been quite late in both ending their bond purchases and tightening monetary policy,” Stretch said.

He added, while the ECB had “clearly missed a trick” at its last meeting, medium-term inflation expectations had fallen towards the central bank’s target threshold.

“That’s a sign that those medium to longer-term inflation expectations may not necessarily be materially disintegrated, but from the perspective of the ECB policy signaling, it’s clear that the need to act and act quickly is clear,” said Stretch.

Graham Secker, chief European equity strategist at Morgan Stanley, said the weakness in the euro could boost European companies ahead of the upcoming second-quarter earnings season.

“Twelve months ago the euro was over $1.20 and now we’re clearly very close to parity so there’s quite a significant tailwind to earnings right now, but I see that as positively offsetting against some of the other negatives that are on the way,” Secker told CNBC’s “Street Signs Europe”.

“Right now, our expectation is that the Q2 earnings season is likely to end with a net hit,” he added.

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