The euro’s fall against safe-haven currencies was not the only factor in the weaker performance. The pound rose against the Swiss franc and the Japanese yen as markets were closed for Independence Day. Meanwhile, the U.S. dollar weakened against most other major currencies. Although the euro is currently near a five-year low, it could still move higher against the dollar if the ECB acts as a catalyst for a rally.
Equity markets around the world rose slightly last week due to a shift in inflation expectations and renewed uncertainty over the impact of COVID-19 on European economies. The impact of information about the new Omicron variant induced considerable intra-period volatility, but this impact faded towards the end of the review period. Meanwhile, the short end of the benchmark euro short-term rate (EURSTR) forward curve increased until the end of the month, but then retreated to signal an earlier rate hike.
The Euro is now near parity with the US dollar. The decline was largely due to a decline in global stock markets due to worries about the health of several major economies. Investors have increasingly viewed the dollar as a safe-haven currency in recent weeks, with it reaching two-decade highs against several other currencies. The Euro has been particularly weak in recent weeks due to a sharp spike in the price of gas and a war in neighbouring Ukraine.
Meanwhile, the recent surge in euro zone inflation has reinforced the case for an ECB rate hike. The ECB is currently on track to hike rates by 25 basis points on July 21, though it may not be enough to give the euro a strong lift. In addition to the ECB’s imminent rate hike, a number of downside risks in the eurozone still remain, such as a possible gas supply crunch in the region and the political uncertainty in Italy.
The risks surrounding euro area GDP growth are largely balanced. The emergence of a pandemic in Europe or spread of new strains of the virus could impede growth. However, increased household savings and supply-side bottlenecks could boost the region’s recovery. These factors should help boost the euro’s performance in the coming quarters. The euro should strengthen significantly in 2022 and continue its strong position in the second half of 2018.