The euro's drop to a five-year low is rekindling the possibility the currency will reach parity versus the dollar for the first time in two decades, as fears of a euro zone recession encourage investors to pile on the bearish bets.
Russia's move to cut off gas supplies to Bulgaria and Poland is the latest blow for the currency, already pressured by the twin headwinds of a surging dollar and sweeping COVID-linked lockdowns in China, a major market for bloc exports. Germany and other European countries could be next in line for restrictions on gas.
More downside is likely, said Vasileios Gkionakis, EMEA head of G10 FX strategy at Citi, adding that "speculative positioning is much cleaner than before, suggesting scope for bigger 'short' accumulation." That's because markets are prepped for far more aggressive tightening from the U.S. Federal Reserve, with money markets betting U.S. rates will rise by 1% in the next two meetings."In the euro zone, you're really only talking about getting that deposit rate out of negative territory and maybe back to slightly positive territory by year end. What that means is that the European currency depreciates," said Craig Inches, head of rates at Royal London Asset Management.
Euro downside is guarded by sizeable option contracts around the early-2017 low of $1.0340, and then the $1.02 level last hit December 2002, according to two traders.
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