EUR/USD remains depressed and pierces parity

  • Further weakness prompts EUR/USD to breach the parity level.
  • Extra downside could challenge the YTD low near 0.9950.
  • The dollar extends the rally further beyond the 108.00 yardstick.

Sellers remain well in control of the sentiment surrounding the European currency and drag EUR/USD to levels just below parity at the beginning of the week.

EUR/USD now looks to a probable test of 2022 low

EUR/USD retreats for the third straight session on Monday on the back of the unabated move higher in the greenback, which has so far pushed the US Dollar Index (DXY) well past the 108.00 mark to new multi-week peaks.

Indeed, the solid performance of the dollar remains propped up by recent the recent hawkish tone from Fed speakers and divided opinions regarding the size of the Fed’s rate hike next month. On this, CME Group’s FedWatch Tool now sees the probability of a 75 bps raise at nearly 55% vs. around 45% of a 50 bps hike.

The daily decline in the pair comes along another positive performance in the German 10y Bund yields, which already approach the 1.25% region.

There are no data releases scheduled in the euro area on Monday, whereas the Chicago Fed index will be the only release across the pond in a week dominated by the Jackson Hole Symposium towards the end of the week.

What to look for around EUR

EUR/USD hovers around the parity level, or multi-week lows, in a context clearly favoured to further dollar strength.

Price action around the European currency, in the meantime, is expected to closely follow dollar dynamics, geopolitical concerns, fragmentation worries and the Fed-ECB divergence.

On the negatives for the single currency emerge the so far increasing speculation of a potential recession in the region, which looks propped up by dwindling sentiment gauges and the incipient slowdown in some fundamentals.

Key events in the euro area this week: Germany, EMU Flash PMIs, EMU Advanced Consumer Confidence (Tuesday) – Germany Final Q2 GDP Growth Rate, Germany IFO Business Climate, ECB Accounts (Thursday) – Germany GfK Consumer Confidence.

Eminent issues on the back boiler: Continuation of the ECB hiking cycle. Italian elections in late September. Fragmentation risks amidst the ECB’s normalization of its monetary conditions. Impact of the war in Ukraine on the region’s growth prospects and inflation.

EUR/USD levels to watch

So far, spot is losing 0.26% at 1.0012 and a break below 0.9989 (monthly low August 22) would target 0.9952 (2022 low July 14) en route to 0.9859 (December 2002 low). On the other hand, the next up barrier comes at 1.0202 (high August 17) followed by 1.0295 (55-day SMA) and finally 1.0368 (monthly high August 10).

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