The euro’s uncoupling from parity with the US dollar is only temporary and short-lived. The common European currency, on the other hand, has room for further weakening. This is also due to the better condition of the US economy compared to the European one.
Strengthening the euro
The single European currency did strengthen slightly against the US dollar during Monday’s trading, but this may not be long-lived. Erik Nelson, currency strategist at the US bank Wells Fargo, thinks so. According to him, the US central bank will react more vigorously to record high inflation than the European Central Bank. “Powell sounded to me very hawk-like in tune,” Nelson told Yahoo! Finance after hearing a speech by the head of the US Fed.
Increasing the base interest rate
The ECB is expected to raise its key interest rates, but nothing drastic is expected. Moreover, according to Nelson, the European economy is in worse shape ahead of the likely upcoming recession than the US economy. Investors have been closing their short positions on the euro relatively quickly so far, which, according to Erik Nelson, is just a sign that the euro still has somewhere to “fall”. We will be wiser on Thursday and next week when the Fed will decide on interest rates. And this just a few days after the ECB’s monetary policy decision.
