Currency outlook: Euro drops below parity with the US dollar, Pound rocked by BoE recession warning

Euro
EUR/GBP: Down from £0.85 to £0.84
EUR/USD: Down from $1.02 to $0.99

The euro has struggled to hold its ground in recent weeks as EUR sentiment has been battered by concerns over Europe’s mounting energy crisis.

Energy prices in Europe skyrocketed in August, with gas prices striking a new record high amid fears that Russia will further reduce gas flows to the continent. The EUR/USD exchange rate dropped back below parity as investors fear the energy price crunch means it is inevitable that the Eurozone will slide into a recession by the end of the year.

However, it wasn’t all doom and gloom for the euro. EUR exchange rates found fleeting gains in mid-August on the back of some positive GDP figures and a pullback in the US dollar. Looking ahead, the euro is likely to face an uphill battle so long as Europe remains at risk of a gas shortage this winter. Although another 50bps rate hike from the European Central Bank (ECB) at its next policy meeting could help to cap losses in the single currency.

Pound
GBP/EUR: Up from €1.17 to €1.18
GBP/USD: Down from $1.20 to $1.17

The pound got off to a poor start in August, following the Bank of England’s (BoE) latest interest rate decision. While the BoE raised interest rates by 50bps – its largest increase in 27 years – it spooked GBP investors with its accompanying forecasts as it warned the UK is highly likely to slip into a recession this year. Sterling then traded sideways for the next couple of weeks, as recession fears, a political leadership vacuum and growing discontent among workers offset bets for another 50bps rate hike from the BoE in September.

The GBP selloff then resumed in the second half of the month amid fears over the economic impact of widespread industrial action and warnings UK inflation could climb
above 18 per cent.

The direction of the pound over the next month may be primarily shaped by the next UK Prime Minister. If the economic policies implemented by Rishi Sunak or Liz Truss aren’t seen as adequate enough to tackle the cost of living crisis, the pound is liable to fall.

US Dollar
USD/GBP: Up from $0.83 to $0.85
USD/EUR: Up from €0.97 to €1.00

The US dollar continued to attract support over the past month as growing global recession fears continued to underpin demand for the safe-haven currency.
However, the US dollar’s ascent did not come without hurdles. The greenback faced a major setback with the publication of the latest US consumer price index, with July’s figures reporting a larger-than-expected slowing of inflation.

This slump in inflation prompted USD investors to temporarily scale back their bets for the Federal Reserve’s September interest rate decision, before some hawkish Fed rhetoric revived expectations and the greenback’s fortunes.

Going forward, the US dollar is likely to remain well supported as global recession fears continue to dictate market sentiment, while
the prospect of another 75bps rate hike from the Fed is also likely to underpin USD exchange rates.

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