Concerns over Europe’s energy security and recession fears, combined with a surging USD pull EUR/USD to parity, a level that was last seen in 2002.
· Rising China COVID-19 cases fuel fear over the economic recovery, pulling commodity prices lower
· DAX falls ahead of German ZEW economic sentiment
· GBP/USD falls to a 2-year low as investors worry about inflation, changing consumer habits
Rising COVID-19 cases in China and fears over Russian gas supply hit risk sentiment yesterday, sending stocks across the board lower while boosting the safe-haven USD.
China has seen a sharp increase in the spread of a high contagious BA.5 Omicron variant which has resulted in 30 million Chinese across six cities being placed under some form of movement restriction. Reports of rising cases in Shanghai are prompting fears of further lockdowns while bringing a realisation to the market that any economic recovery in China will be drawn out in anything but linear.
Commodity prices fell sharply yesterday and are falling again today. Crude oil trades down 2%, heading towards the European open. Commodity currencies such as the Aussie and the Kiwi have fallen to 2-year lows.
DAX
Energy security in Europe is also hurting risk sentiment. The Nord Stream pipeline, which transports Russian gas to Germany, has gone offline for annual repairs until June 21st. Fears are rising that Russia won’t switch supplies back on, particularly as the EU is preparing to impose a phased-in embargo on Russian oil and ban maritime insurance for any tankers carrying Russian crude. Gas supply from Russia to Germany has already fallen 40%. A cut-off of supplies would mean that rationing to the industry would be needed, which would accelerate the region’s move into recession.
The DAX fell 1.4% yesterday and is pointing to a 0.6% loss on the open today.
EUR/USD
These same fears are being played out in the currency market and have pulled EUR/USD to 3 pips above parity. The pair has tumbled 4.5% since the beginning of July, owing not only to the dire economic outlook in Europe but also to a relentless rally in the USD.
German ZEW economic sentiment data is due to show that confidence slumped further in July. The economic sentiment index is expected to fall to -38, down from -28, and the current situation index is forecast to fall to -33.5, down from -27.6, as the economic outlook for the region deteriorates.
GBP/USD
The pound has also tumbled in recent sessions and trades at a fresh two-year low against the USD as investors fret over rising inflation, domestic political uncertainty, and an almost unavoidable recession.
Data overnight from the British Retail Consortium revealed that retail sales fell 1.3% YoY in June after falling 1.5% YoY in May. This marks the fifth straight month of declining sales. Weaker sales suggest that consumers are changing their spending habits as inflation and energy bills rise.
GBP/USD has fallen below 1.19 and is heading towards 1.1850. The FTSE is set to open 0.5% lower.
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