As Putin continues to pursue his pointless war against Ukraine, its not-so-pointless effects rip havoc on most of the European continent. And other than bracing for a cold winter this year due to a shortage of natural gas. Europeans also have to contend with higher living costs due to a weakening euro, trading at a two-decade low to the dollar.
To make matters even worse, the British Pound crashed after the government announced tax cuts and increased spending from borrowing to help ease inflation. So is the rest of the European continent headed for the same fate, and will the parity between the dollar and the euro still be there by the end of the year? Keep reading to learn more, and look at this list of forex brokers to help you start investing.
What Factors are Affecting the Euro / Dolar Relationship?
Inflation and Dropping Growth Rates
The war on Ukraine has not done anyone any favours, especially the European continent. Furthermore, Europe depends heavily on Russian energy supplies, but the continent is hurting now that Russia has cupped off oil and natural gas. Ukraine is also one of the world’s largest food producers and is responsible for exporting food to many parts of Europe and other countries.
But now that most of the country is more concerned with repelling the Russian invasion, their yields are at a record low, skyrocketing food prices. In addition, China, the world’s largest goods producer, is also suffering an economic slowdown, whose effects are starting to ripple in the European continent.
ECBs Whawk Stance
The European Central Bank earlier this year adopted a hawkish stance to help it combat inflation. This led to the ECB raising interest rates again at the beginning of the month, and it doesn’t yet seem like they are ready to start easing on the measures. Furthermore, the US’s headstrong contractionary efforts are having more influence on the Euro / Dollar relationship than measures from ECB.
However, despite the prevailing conditions, the ECB has committed to take even more aggressive stances in the future until the euro responds positively.
The Dollar’s Safe Haven
After the war in Ukraine broke out, because of the USD’s safe-haven status, it enjoyed an increase in demand, strengthening its position against other currencies. It has rallied 13% this year alone, which has helped boost the dollar against the euro. And when you factor in the euro’s current woes, it’s no surprise there is parity between the two.
The Federal Reserve Monetary Policies
Like the central bank in the European Union, the Federal Reserve has had a hawkish stance and is aggressively raising interest rates to match inflation numbers. It has also stated that it will continue increasing interest rates until it tames the beast. Currently, the inflation rates are down to 8.5% from a previous high of 9%. In contrast, the inflation rates in Europe were at 10.1% in August, which does not help the euro’s case.
What to Expect
As the current energy crisis in Europe persists and as winter quickly approaches. If the continent doesn’t mend relationships with Russia soon, the euro might continue to trade at parity with the dollar for the foreseeable future.
Furthermore, some analysts have already started to look into the probability of a technical recession in the last quarter of this year and the first in 2023. They also project that the pair will continue to trade in parity for the next two quarters, well into next year and at $1.07 by July next year. However, that will have risen to a healthy $1.10 by January 2024.
These Are Unstable Times
We can attribute the current recession affecting the European continent and most parts of the world to many culminating factors. We’re just at the tail end of the global shutdown that saw many industries halt for an extended period, and even though they’re open, they are still feeling the effects. However, the worsening energy crisis in Europe can be attributed to, and we’re sorry for saying this, one man’s misguided sense of patriotism.
In addition, the situation in Eastern Europe is unfortunate and not to mention senseless. The sooner we can resolve that conflict, the sooner the energy and inflation crisis Europe and the rest of the world are facing can end.
