EUR/USD to test parity if Russia shuts off energy flows – Scotiabank

How low can EUR/USD go? As the rising possibility of a Russian gas ban could erase the European Central Bank (ECB) hikes expected by markets, economists at Scotiabank believe the pair could tumble to parity.

Difficult to envision gains above 1.10 over the remainder of the year

“We think that building economic pessimism and a clearly disadvantageous monetary policy divergence between the ECB and the Fed places the EUR at a clear risk of testing its early-2017 low of 1.0341 in the coming days or weeks.” 

“If Russia shuts off energy flows, the bloc’s industrial complex may have to heavily reduce output, flipping the Eurozone into recession. This would pave the way to a test of parity for the EUR as Eurozone financial outflows mount due to a worsening economic outlook which forces the ECB to put off hikes.” 

“Beyond the ECB, the only major source of EUR support would be a material easing of Ukraine war risks that does away with recession fears, with a broad improvement in risk sentiment in markets (and a widespread weakening of the USD) acting as additional support.” 

“Given the monetary policy outlook and sluggish growth, it’s difficult to envision EUR gains above 1.10 over the remainder of the year amid ongoing geopolitical risks.”