Published: 14/07/2022 By ECAP
The euro officially broke through parity levels against the dollar for the first time in almost twenty years yesterday afternoon, after another US inflation beat triggered a fresh bout of greenback strength. Whilst there was a bit of confusion among market participants as to whether the parity milestone had actually been achieved on Tuesday, there was no doubt on Wednesday. The key pair has met significant support around the 1.0000 level in the past couple of days, with a wall of options preventing an easy move below the key physiological level. US inflation increased by 9.2% in June (1.3% month-on-month), comfortably above the 8.8% expected by economists. Core inflation eased on a month previous, although also beat expectations, coming in at 5.9% (5.7% consensus).The move higher in the greenback was, however, rather short-lived, and EURUSD moved back above the 1.01 handle as the afternoon progressed. Attention quickly turned to the impact of the inflation overshoot on the US
economy, with market’s fretting that persistently high price growth, and an aggressive response from the FOMC, could tip the US economy into a technical recession later in the year. Whilst markets still argue that these concerns are slightly overdone, this risk has clearly heightened following yesterday’s data. Indeed, it is now not out of the question that some Fed members could follow in the footsteps of their Canadian counterparts in supporting an even larger 100 basis points hike at the next FOMC meeting. The Bank of Canada shocked investors by raising rates a full one percentage point on Wednesday, their largest rate increase since 1998, while indicating that more hikes to above 3% in the base rate were on the way. In its press conference, the BoC said "by front-loading interest rate increases now, we are trying to avoid the need for even higher interest rates down the road’. Somewhat surprisingly, the reaction in CAD was relatively contained.