The gas crisis in Europe is getting worse, with high interest rates posing additional threats to the economy. In this light, the euro is moving sluggishly and is expected to sink even deeper.
The euro has lost more than 14% against the dollar since the beginning of the year. It updated the 20-year low last week due to a surge in natural gas prices in Europe.
On August 30, the euro is trading at 1.0022 versus the greenback, up by 0.24% from the previous day.
The euro is feeling tremendous pressure due to sky-high natural gas prices, with the number of net short positions reaching the highest level for the first time since the beginning of the pandemic. According to CFTC data, net short positions in the euro totaled 44,100 in the week to August 23. Figures came in at 42,800 a week earlier. This has been the highest reading since the first week of March 2020, when the number of net short positions in euro amounted to 86,700.
Any news related to Russia's Nord Stream pipeline and gas prices in the eurozone will clearly be driving the euro in the next few weeks. By the way, gas futures in Europe fell by over 5% from $2,700 per cubic meter today.
The market is likely to stay highly volatile in the coming days as the Nord Stream 1 pipeline will be closed from August 31 to September 2 due to maintenance work.
In addition, Germany's inflation statistics will be driving EUR/USD today. The data will be published later in the course of the trading session. According to preliminary estimates, annual inflation is expected to slow down to 7.5% versus 7.8% in August.
Additional pressure on the euro is exerted by the stronger greenback, which is considered a safe-haven asset. Yesterday, the US dollar index skyrocketed to 109.8, the high unseen since September 2002, on the news of the hawkish Federal Reserve.
Earlier today, the greenback somewhat dropped against the basket of major currencies as market players are awaiting the release of important macro results with US unemployment data due on Friday.
The Federal Reserve is likely to raise the interest rate by 50 basis points. The Core Personal Consumption Expenditure Price Index dropped by 0.1% month-on-month in July after a 0.6% surge in June. This indicator guides the US central bank in making interest rate decisions. This time, it shows a contraction in price growth, which means that the Federal Reserve's strategy is working.
A 75-basis-point rate hike will be possible if prices resume growth in August. There is still enough time before the data comes.
Due to another spike in natural gas prices in Europe, inflation has become hard to project. Therefore, near-term growth forecasts have been revised. Last week, Isabel Schnabel, a member of the Executive Board of the European Central Bank, and Francois Villeroy de Galhau, the governor of the Bank of France, said at the Jackson Hole that the ECB would stay hawkish for a long period of time as it is needed to curb inflation in the eurozone.
The European Central Bank is planning to hike rates by as much as 50 basis points, while some officials are advocating for a 75 basis-point increase at the meeting on September 8.
Since the ECB is going to lift interest rates, the investment attractiveness of the euro might increase, which means in the next 6 to 12 months, there could be a shift in money flow, which is currently coming to the United States and other regions from Europe.