EUR/USD still seen breaking decisively below parity – MUFG

Analysts at MUFG Bank still have a conviction that the EUR/USD pair will break decisively below parity. They point out energy supply fears in Europe are set to remain a heavy weight on the euro as the Federal Reserve sticks to hawkish rate hike plans. They add Italian politics to downside risks.

Key Quotes:

“We expect the EUR to remain under downward pressure in the near-term driven by ongoing fears over disruption to the euro-zone economy from energy supply constraints and fragmentation risks. Those fears are unlikely to ease in the coming weeks and will be tested by the re-opening of the NordStream 1 gas pipeline on 21st July.”

“The ECB also faces a key test in the week ahead when it is expected to announce details of their new anti-fragmentation policy tool. The pick-up in political risk in Italy in recent days has made it even more timely that the ECB steps up to the plate and delivers a credible response to contain fragmentation risks. If there is any disappointment amongst market participants over the new tool then it will reinforce EUR weakness in the near-term especially if an early election is called in Italy as well.”

“Fed’s job remains less complicated at this stage as they are free to focus on lifting rates to dampen inflation risks. The stronger US CPI report increases the risk of further large Fed hikes at upcoming policy meetings which is encouraging an even stronger USD.”