European Currencies Weaken Against the Dollar Amid Recession Fears

July 6th, 2022

The euro and pound sterling have seen sharp single-day drops against the US dollar yesterday, July 5, amid growing concerns of a European recession due to rising natural gas prices. Gas prices in Europe and Great Britain rose another 17%, indicating that inflation might go even higher.

Fears of a recession are leading to forex markets prioritizing safe-haven currencies, helping the dollar climb against other currencies. The euro fell by approximately 1.75% against the dollar, reaching the level last seen in 2002, while the pound sterling fell by 1.6%, reaching 2020 levels.

The European Central Bank has vowed to tackle rising inflation and is expected to make an announcement on raising its rates after a meeting scheduled for late July, with the hikes set to happen in September. However, the ECB hiking rates is causing concerns of potentially slowing economic growth, further adding to the fears of a recession in Europe.

Conversely, yesterday was the dollar’s largest single-day gain since March 2020, when the pandemic hit the markets. Similarly to the euro and sterling, the Norwegian krone dropped by more than 2%, exacerbated by Norway’s gas workers going on strike.

The euro also dropped against the Swiss franc, another safe-haven currency, reaching similar levels to 2015, when the Swiss National Bank abandoned the franc currency cap. The pound sterling similarly weakened against the franc by 0.7%.

Shaun Osborne, Chief FX Strategist at Scotiabank, stated that “[t]he pound is at clear risk of further losses given a weak economy and what we think are overextended BoE hike wagers,” per Reuters.

The BoE (Bank of England) had raised rates five times since December 2021, in an attempt to combat high inflation and safeguard the economy. Regarding the future monetary plans of the BoE, something may be gleaned from the speeches by BoE’s Chief Economist Huw Pill that will be held later today, on July 6, and Policy Committee Member Catherine Mann, scheduled for Thursday, July 7.

The volatility of European currencies is of growing concern for many traders and economists, particularly as there is the possibility of Russian gas to Germany being shut off in July. Russia has already cut back on the amount of gas it exports to Europe and a suspension of gas exports is not inconceivable.

Regarding the US dollar in relation to world currencies, it strengthened against non-European currencies as well. The Australian dollar fell by 1.7% against the US dollar, the Canadian dollar fell to 19-month lows, while the Japanese yen dropped to 24-year lows.

The current situation in the forex market may change daily and we will keep you informed of any major movements.

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