Traders work on the floor of the New York Stock Exchange during morning trading on August 15, 2022 in New York City.
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The euro traded at a two-decade low of 0.9903 against the US dollar on Tuesday morning, with analysts predicting the single currency’s slide would continue.
“Our outlook and our position in terms of trade and strategy is clearly biased towards further euro depreciation from where we are now,” Citibank’s head of CEEMEA strategy Luis Costa told CNBC’s “Squawk Box Europe” on Tuesday.
“This is now the initial point of euro weakness,” Costa said.
There are multiple factors when comparing the euro and dollar, keeping pace with 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 its main pipeline, Nord Stream 1, to Germany, while a heat wave put additional pressure on energy supplies.
For the full picture, you need to look beyond Europe and the United States, Costa says.
“It should not be forgotten that there is an additional layer of complexity here because of the Chinese recession which obviously hits Europe much harder than the impact in the States,” he said.
China missed GDP expectations with a 0.4% growth in the second quarter. The world’s second-largest economy has struggled with the country’s worst Covid-19 outbreak since the start of 2020.
Until May, markets were “considering hawkish flight paths” for the European Central Bank and the Bank of England, but those plans have “exploded” in recent months, according to Costa.
“Talking about the ECB liftoff… it is quite clear that the ECB room lift rate will be minimal,” he said.
Roelof-Jan Van den Akker of global finance institution ING made a similar prediction on CNBC’s “Squawk Box Europe” last week, suggesting a widening of the interest rate differential between the US dollar and the euro as well as further weakening of the single currency.
“[The dollar] 103.60 broke below the support level. This is a very important horizontal support … and I suggest that there are worse possibilities to go. The long-term target is between $0.80 and $0.75 in the coming months,” van den Acker said.
“It confirms that there is euro weakness alongside dollar strength,” he told CNBC.
The predictions echo concerns that inflation will continue to rise and that a recession in Europe is now inevitable.
The dollar’s strength may not last, according to Societe Generale Macro Strategist Kit Juckes.
“Perhaps, all in all, the dollar’s rally is going as far as it can go on the current news,” he wrote in an email Tuesday morning.
“Not to say that Europe’s energy woes, China’s economic weakness and policy easing, and US jobs/inflation data can’t send it further, but when I read that buying dollars is the ‘easiest trade in FX’ the hairs on my neck stand up. Warns me to be careful,” Jukes wrote.
And Europe should be able to recover from that “sorrow,” according to the strategist.
“I still don’t see how it can rally much on anything other than short covering, but if risk markets don’t intervene, the euro could find a footing here,” he wrote.