How Low Can EUR/USD Fall If It Breaks Below 1

EUR/USD was already bearish last year as inflation kept growing in the US, but it has picked even more pace this year. Inflation in the US has continued to grow and the FED has turned extremely hawkish, delivering a 75 bps hike in the last meeting and planning to raise them to 3.50% by year-end. The ECB is planning to start hiking interest rates this month, but they are way behind the FED, which has been keeping the Euro bearish.

NY Fed Pres. Williams Saying on Friday:

• Debate of 50-75 basis points is the right position for July meeting
• More data to come, but Fed still needs to move expeditiously to more normal rate levels
• Fed funds rate at 3% to 3.5% by year-end, but a lot of uncertainty after that
• Terminal level of rate hike cycle will hinge on behavior of inflation, and inflation expectations
• Rising market interest rates are affecting the economy, but full effect of the Fed pivoted won’t be apparent until later in the year
• Spending data is probably the 1st place where global slowdown will be seen. Jobs will lag
• Expects to get some help from supply-side, but demand and supply must be aligned
• Commodity price reversals could have a disinflationary impact
• Recession not base case but clear the economy is slowing
• Negative GDP in Q1 enter data into the spring not a signal of something fundamentally negative

The New York Fed Pres. may be up for debate on 50 or 75 basis points, but the market is looking for 75 basis points after today’s jobs this week. Next week’s CPI data which is expected to rise by close to 1% for the month is also not the type of data that would encourage anything other than another 75 basis point hike.

The energy crisis in Europe due to sanctions on Russian gas and Oil is also another factor for the latest dive close to parity in this pair. Although on the last day we saw a reversal at around 1.075 and a 100 pip climb off the lows, forming a hammer candlestick on the daily chart. That is a bullish reversing signal and the fact that there was strong buying pressure close to parity shows that there’s some protection there.

EUR/USD Daily Chart – The Decline Picking Up Speed

The 1 level survived this time

But the way things have been going we might see a break of the big level at 1 soon. Although the question that remains is how low can EUR/USD fall if that level gives way? MUFG Research discusses EUR/USD outlook and sees room for the pair to fall towards 0.9450 on a break of parity.

“It now appears only a matter of time before EUR/USD hits parity for the first time since late in 2002. Beyond parity how much further could the pair fall? Looking at price action in the early 2000’s, the pair fell to a record low of 0.8230 in October 2000 and for the most part fluctuated around the 0.9000-level between 2000 and 2003. According to our long-term PPP valuation model estimate that record low for EUR/USD stood around 2 standard deviations below fair value,” MUFG notes.

EUR/USD Live Chart

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Skerdian Meta

Lead Analyst

Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.

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