CMC Markets sees possible path down to parity opening up for euro

The task of managing the differences between economies in the single currency bloc has been magnified by the war in Ukraine and may result in further losses for the euro, perhaps even towards parity with the US dollar, City-based analysts say.

In a note sent to clients, Michael Hewson, chief market analyst at CMC Markets UK, said the European Central Bank was facing the prospect of having to raise interest rates into the teeth of an economic slowdown, even as the US Federal Reserve was signalling its intention of raising official short-term interest rates to more than 3% over the next 12 months.

Complicating matters further, said Hewson "with little sign of a de-escalation by Russia as it weaponizes energy supplies, its highly likely that the ECB's room to raise rates could well be very limited."

From the point of view of technical analysis, Hewson believed that the euro-dollar exchange rate had carved out a triangular consolidation pattern over the past five years with the current week's break below the March 2020 lows of 1.0636 possibly signalling additional weakness towards 1.0340 in the short-term, the prospect of a move towards parity and also a measured move to 0.9660.

"These types of price breakouts on a triangle basis, if confirmed on a monthly close, tend to take some time to play out, so we’re not talking an imminent move lower, but unless we get a strong recovery off current levels, and above 1.0850, the ECB may well be faced with a bigger problem of whether to raise rates," he added.

As an aside, in parallel, there had been some speculation of late that the Russian President, Vladimir Putin, could be contemplating calling and end to the war in Ukraine on 9 May, on the anniversary of the Nazi surrender in WWII.

However, another possibility, according to some analysts, was that Moscow might order a larger mobilisation in order to take further territory from Kyiv.

Also worth noting, on monthly price charts for example, euro-dollar appeared to have reached so-called 'oversold' levels.