Tuesday morning, the euro was trading at a two-decade low of 0.9903 against the US dollar, with analysts predicting the single currency will continue to fall.
“Our outlook, trades, and strategist position are definitely biassed towards further euro depreciation from where we are now,” Luis Costa, Citibank’s head of CEEMEA strategy, said on CNBC’s “Squawk Box Europe” on Tuesday.
“This is the primary source of euro vulnerability right now,” Costa explained.
When comparing the euro and the dollar, multiple factors are at work, including the ongoing conflict in Ukraine and rising inflation in both regions.
Wholesale gas prices in Europe rose sharply on Monday after Russia announced unscheduled maintenance on Nord Stream 1, its main pipeline to Germany, while heat waves added to the strain on energy supplies.
According to Costa, in order to get the full picture, you must look beyond Europe and the United States.
“Let’s not forget that there is an additional layer of complexity here from the China slowdown, which obviously hits Europe with a much greater magnitude than the impact in the United States,” he said.
China’s GDP growth in the second quarter was only 0.4%, falling short of expectations. Since the beginning of 2020, the world’s second-largest economy has been dealing with the fallout from the country’s worst Covid-19 outbreak.
According to Costa, markets were “considering hawkish flight paths” for the European Central Bank and the Bank of England until May, but those plans “imploded” in recent months.
“We’re talking about ECB liftoff… “It’s clear that the ECB’s room to raise rates will be limited,” he said.
Last week, Roelof-Jan Van den Akker of global finance institution ING made similar predictions on CNBC’s “Squawk Box Europe,” predicting a widening in the interest rate differential between the US dollar and the euro, as well as further deterioration of the single currency.
′′[The dollar] fell below the 103.60 level of support. That is a critical horizontal support… And I believe there is still room for more downside. Van den Akker set a longer-term target of $0.80 to $0.75 in the coming months.
“It confirms both dollar strength and euro weakness,” he told CNBC.
The forecasts echo concerns that inflation will rise further and that a European recession is now unavoidable.