EUR/USD takes on the lowest level since 2017, parity now eyed

• EUR/USD falls to fresh bearish cycle lows as the US reaches a new 20-year high.
• Risk-off sentiment is supporting a flight to the US dollar.

EUR/USD is down some 1.35% after falling from a high of 1.0529 to a low of 1.0353 on Thursday due to a firm US dollar as risk-off sentiment takes hold.  Global shares are at their lowest point in 18-months, supporting the greenback to a fresh 20-year-high as investors fear that inflation pushing up interest rates will bring the global economy to a standstill.

Europe's continent-wide STOXX 600 index fell 0.63% on Thursday as German warned that Russia was now using energy supplies as a "weapon" which has weighed on the single currency. Tensions were stoked as Finland confirmed it would apply to join NATO "without delay" in the wake of Russia's invasion of Ukraine, a war that is driving up global energy and food prices.

As a consequence of the risk-off sentiment, the DXY, an index that measures the US dollar vs. a basket of rivals is trading at a new cycle high of 104.925, carving out the way towards the 2002 high near 107.  Subsequently, the euro is trading at a new cycle low near despite hawkish the European Central Bank's comments.

European Central Bank policymaker Peter Kazimir dropped a hint about a July interest rate increase on social media on Wednesday, joining a growing number of colleagues in calling for a hike to tackle record-high inflation.

"(I am) ready to hike in July -- and not just the beautiful Atlas Mountains here in #Morocco," the Slovak governor wrote on Twitter.

''Of course, this is a bit anti-climactic after President Lagarde pretty much sealed the deal earlier this week.  More importantly, there seems to be a growing consensus that the deposit rate will move into positive territory by year-end, which would require three hikes to accomplish,'' analysts at Brown Brothers Harriman argued.

Meanwhile, the market's expectations for Fed tightening picked up a bit after the Consumer Price Index data but have since fallen back, weighed by Producer Prices that fell short of expectations. The US Producer Price Index increased by 0.5% in April compared with a 1.6% jump in March. Excluding food and energy, the core PPI climbed by 0.4%, lagging the 0.7% gain expected. Core PPI grew by 1.2% in March. On a year-over-year basis, producer price inflation surged 11% in April, and core PPI jumped 8.8%, the Bureau of Labor Statistics said Thursday.

Parity eyed

''The US dollar is gaining today despite falling yields, which illustrates the so-called dollar smile whereby it gains during periods of risk-off as well as in periods of strong US data and rising yields.  Either way, the dollar’s climb is likely to continue for the time being,'' the analysts at BBH forecasted. ''We continue to target the January 2017 near $1.0340. After that, we have to start talking about parity.''

Meanwhile, analysts at Rabobank, ''in the current environment'' continue to view the USD as the obvious haven currency. 

''We have argued repeated our view the USD’s safe haven credentials stem from the greenback’s own fundamentals rather than those of the US. The USD dominates the global payments systems and is used as an invoicing currency all over the world. Even in the Eurozone, a high proportion of invoices are written in USD,'' the analysts explained. 

''In recent years, low US rates has encouraged steady growth of USD denominated det issuance from non-US currencies. These debts need to be maintained. The implication is that there is a strong need for USDs across the globe which is brought into focus as liquidity is tightened. 

While we don’t see US fundamentals as creating the USD’s safe haven status, the US’s relatively strong position in terms of food and energy security is likely enhancing the appeal of the greenback. Earlier this week, we revised up our USD forecasts across the board. We see risk of EUR/USD at 1.03 on a 1 month and 3-month view.''