Forex focus: US Dollar rises, Euro tumbles in markets
The foreign exchange market is experiencing high levels of volatility, a boon for FX traders. The Euro has dropped below $1 for the first time in two decades, putting the European currency on course for one of the worst years in its history. Conversely, the US Dollar is experiencing its biggest rise in twenty years.
The reason for the Euros decline is the energy price shock triggered by the ongoing Ukraine-Russian conflict. War has plunged Europe into a prolonged economic crisis.
The Euro has teetered on the brink of parity versus the USD in July, finally breaching that important resistance level on July 13.
The Euro has seen an 11.8% year-to-date drop, nearly on par with losses seen in 2015 when the European Central Bank (ECB) implemented huge stimulus plans.
The Euro move could open the doors for a Forex move towards $0.96, with some analysts expecting a fall to $0.90 if natural gas supplies continue to be disrupted.
Raise interest rates, combat inflation
The currency drop puts the ECB in a similar bind to the US Federal Reserve – the bank needs to combat rampant inflation while balancing a strained economy.
The ECB announced it’s expected to raise interest rates later in July. This will be the first time the bank does so since 2011.
The current Euro weakness worsens Europe’s inflation problem, yet the ECB can’t risk policy tightening, stalling the economy.
The euro’s latest drop was due to natural gas flows through Russia’s Nordstream 1 pipeline stalling for 10 days due to maintenance. Economists are concerned that if Russia extends the shutdown, Europe may be forced to ration fuel.
Rising energy costs are already taking its toll on commuters and investor sentiment. Germany reported its first trade deficit since 1991 and overall investor sentiment has dropped below 2020 levels.
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ALL YOUR FOREX QUESTIONS ANSWERED
Fred Razak, CMTrading’s Senior Trading Specialist, answers all your trading questions and more.
Q: What does it mean for the USD to have parity with the Euro?
Razak said: “Basically when you’re trading you’re looking at two currencies and how they’re treated against each other. So for example, when you go to a store and you buy an item, you bought the item and sold them for money. And they store bought the cash from you in exchange. Generally, consumers don’t look at it this way but they’ve bought from you the money and they’ve sold you the items. So there are two parts to a transaction at any given time.
“When you’re trading Forex symbols, they constitute two points – what we call the base currency and the traded currency. The base currency is the one that you’re using and that’s your go-to for the benchmark for what you’re trading. The traded currency is the one you’re buying or selling. So for example, if you’re trading your USD, you’re either using the dollar to trade for Euros. In essence, the Euro is the base currency and the dollar is the traded currency. So in that given scenario, it would cost you a little bit more than a dollar to buy one euro.
“Usually when the value of the euro goes down then that means that the value of the dollar goes up. Now that there’s parity, it means that $1.00 gives you €1.00 and one euro gives you $1.00, whereas before it would probably cost you, let’s say $1.30 or $1.20 to give you €1.00.
“Now $1.00 has the strength to give you €1. So the dollar getting stronger means that instead of costing you $1.30 to buy one euro and now costs you $1.00 to buy one euro. OK, so that’s what parity means. Those are how those two are traded.”
Q: Why has the dollar value increased so much?
Razak said: “It’s not necessarily that the dollar has increased so much it’s that there’s so much pressure on the Euro right now. This is mainly due to things in Ukraine and escalating rhetoric coming out of Russia that affects the rest of Europe. Those things have made a significant crisis in that area and caused ripple effects. The war has created supply chain issues that have increased commodity prices and negatively affected a post-COVID environment. In Europe things are volatile and considering all these factors, they’re adding a lot of pressure on the euro.”
Q: Why has the Euro/Yen/Pound dropped to record lows?
Razak said: “So this is the point where you ask yourself, why has the Euro, Yen, and Pound dropped to record lows? You could say that the dollar has increased in value because the pound and the yen are not so much affected by what is happening in Europe. Most of the wheat that is produced in the world is produced in Ukraine and shipped overseas. The supply issue there affects both the pound and the yen. For Japan, like Britain, most of its foodstuff is imported, except if it’s from the sea. So both of these countries have been hit as well. The dollar has significantly become stronger, mostly because the markets are selling off and then that puts pressure on the dollar to go higher when EU markets are going lower.”
What tips do you have for Forex traders?
Razak said: “So the tip I have for traders is that you want to pay attention to breakouts. The currency breakouts are going to be essential here with volume FX trading. It’s going to be a very useful tool to take advantage of the current volatility. So you know, anytime you have a situation where there’s a possible breakout, taking advantage of it could work for your favor.”