• EUR/USD sinks to fresh bear cycle lows as the greenback picks up the risk-off flows. 
  • The Jackson Hole and prospects of a recession in the eurozone are driving the euro into the ground. 

EUR/USD has been marking fresh lows below parity in the New York session. The cross has fallen from a high of 1.0046 to a low of 0.9926 on the day so far and is down by some 1% on the day ahead of the Jackson Hole this week and with eyes on the European Central Bank minutes of the previous meeting that will be released on Thursday.

The ECB meets to discuss monetary policy on Sept. 9. On the weekend, Bundesbank President Joachim Nagel told a German newspaper that the European Central Bank must keep raising rates even if a recession in Germany is increasingly likely, as inflation will stay uncomfortably high through 2023. 

Meanwhile, Russia's announcement late on Friday of a three-day halt to European gas supplies via the Nord Stream 1 pipeline at the end of this month has weighed heavily on the euro for fears that this could tip the economy into a recession in the face of higher inflation. 

Markets are focused on US events later in the week, with the second estimate of the second quarter growth data in  Gross Domestic Product on Thursday, before the release of personal income and spending data for July on Friday. The main event will be the Federal Reserve comments from the Jackson Hole conference Thursday through Saturday. The main event of the Jackson Hole conference will be Fed Chair Jerome Powell's speech at 10:00 am ET Friday.

The hawkish expectations from a speech have put a bid on the greenback and are weighing on risk appetite sending the Dow Jones Industrial Average lower1.82% to 33,085, with the S&P 500 also down over 2%. Weighing on the euro is the rise in the US two-year yield which has risen by 3% to 3.346% while the 10-year yield climbed 1.68% to 3.04%, implying the yield curve between the two maturities remains inverted, a bearish signal if sustained. This is fuelling a bid on the greenback. Against a basket of currencies, the US dollar was 0.85% higher at 109.09 DXY, not far from the two-decade high of 109.29 touched in mid-July.

In the build-up to the Jackson Hole, there has been a chorus of speakers from the Fed, with hawkish rhetoric fueling a surge in the US dollar. The most hawkish of Fed officials were James Bullard. The central banker advocates a 75bp hike at September's meeting and added he isn’t ready to say the economy has seen the worst of the inflation surge.

“We should continue to move expeditiously to a level of the policy rate that will put significant downward pressure on inflation” and “I don’t see why you want to drag out interest rate increases into next year,” Mr Bullard said in a Wall Street Journal interview. The latest of these officials, Richmond Fed President Thomas Barkin, on Friday said the "urge" among central bankers was toward faster, front-loaded rate increases.

''Financial conditions have continued to ease,'' analysts at TD Securities said. ''Powell's speech will likely aim to reinforce the message that multiple, sizable hikes are still in the pipeline, and easing should not be expected to be on the horizon anytime soon.''

 

 

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