Black clouds over the European economy

Euro sellers pressure could lead quotes of the main currency pair EUR / USD below parity. As a result, in the fourth week of August 2022, we can observe the levels from the end of 2002.

Commodity prices, concerns about recession

Concerns about recession seem to be the most important risk factor for the euro. They may increase in line with rising prices of electricity and natural gas. As a result, the deepening energy crisis and the slim prospects of its resolution may have a negative impact on the European currency in the eyes of global investors.

These natural gas prices appear to be approaching a record level of EUR 300 per megawatt hour. This may be a consequence of the announcement by the Russian energy giant Gazprom, which has announced that gas flows through the country will be closed Nord Stream 1 to Germany due to maintenance works at the end of August. Previously, the gas flow was reduced to 20% due to problems with the turbine. Electricity prices in contracts for next year are also breaking records. In just a dozen or so months, they increased from 50 to 700 EUR.

Eurozone in crisis

The economic troubles of the euro area seem to be confirmed by macroeconomic data. The August Global S&P PMI index showed that business activity in the euro area declined for the second month in a row, albeit to a lesser extent than expected. The S&P Global Eurozone Composite PMI index fell in August to 49,2 from 49,9 in July, above market expectations of 49, according to preliminary reading. The latest data show a second consecutive decline in business activity across the euro area after a 16-month growth period. The overall decline in production was again fueled by a contraction in the manufacturing sector, where production fell for the third consecutive month, according to published data.

Germany experienced the sharpest drop in production since June 2020, and activity in France declined for the first time in a year and a half. Investors await the hawkish tone of the Thursday's meeting report European Central Bank on monetary policy as inflation in the euro area still seems to break records. Recall that in July the ECB surprised by raising interest rates by 50 basis points. Currently, the market may expect two more hikes of 50 bps at the meetings in September and October.