EUR/USD likely to revisit levels back below parity again – MUFG

So far, during the week the EUR/USD pair traded above 1.0000. Analysts at MUFG Bank expect the pair to revisit levels back below parity again considering the natural gas supply uncertainty, the probable resignation of Italian PM Draghi and the implications for fragmentation risks and the very cautious approach to monetary tightening by the ECB. They see EUR/USD trading in the 0.9800-1.0500 range over the next weeks. 

Key Quotes:

“While the US economy looks to be slowing as rate hikes begin to impact sentiment in housing activity, the Fed looks set to hike by 75bps next week which will provide support for the dollar. Only when the FOMC clearly signals a change in policy approach by pausing its tightening cycle will the dollar turn weaker.”

“The US rate market is still expecting more front-loaded Fed tightening. The Fed is now expected to deliver two more 75bps hikes in July and September before slowing the pace of hikes in November and lifting the policy rate to a peak of 3.50% by year end.”

“The main upside risk to our bearish EUR/USD bias could be triggered by a paring back of energy supply concerns in Europe. The EUR would receive a lift if natural gas supply from Russia returns to more normal levels after the NordStream 1 pipeline maintenance period comes to an end. The EUR could be boosted as well by more decisive policy action from the ECB. A combination of a larger 50bps hike this month and convincing plans to keep a lid on fragmentation risk would create a more supportive environment for the EUR especially if snap elections in Italy are avoided as well.”