EUR/USD to tank towards parity if ECB calls off the announced rate hikes – Commerzbank

The largest Polish gas supplier announced yesterday that it will no longer receive gas from Russia. Is the perfect storm looming for the euro? In the view of economists at Commerzbank, EUR/USD could reach parity if Russian gas supplies to Europe were to stop on a large scale.

No surprise that EUR/USD is trading at such low levels as it is currently

“If Russian gas supplies to Europe were to stop on a large scale, large parts of the EU, especially the euro area, would be threatened with recession. Then things would get exciting. Because the ECB would then be in a much more uncomfortable predicament than it has been so far. Would it still raise its key rate in view of the inflation trend? Or would it call off the announced rate hikes to ease the pain in the real economy?”

“If the ECB call off the announced rate hikes we would have the perfect storm for EUR exchange rates: a recession that would only affect Europe, not the US and other economies, high inflation and a central bank that does not fight it, but keeps the interest rate (and thus the EUR carry) in negative territory, while other central banks continue to raise their key rates.”

“I have always said that I think EUR/USD exchange rates near parity are unlikely. If it came to this scenario, I certainly wouldn't say that anymore. And because the probability of this scenario is increasing in light of the news flow described above, it should come as no surprise that EUR/USD is trading at such low levels as it is currently.”