As Stagflation Threat Rises, Most Forex Traders See Euro-Dollar Peer In Survey

Forex traders are set to pummel the euro again because the war in Ukraine and the supply chain crisis heighten the risk of stagflation – driving the single currency to parity with the dollar, which is for the first time in almost 2 decades.

Still, it’s a close call. Some 48% of respondents, which include economists and portfolio managers, forecast further losses at US$0.95 – a significantly more bearish outlook than Wall Street investment banks.

In the opinion of 60% of respondents to the latest MLIV Pulse survey, the euro will eventually end up at the level of the greenback, with a small majority of more than 400 participants betting that it will then rise to US$1.15. It was trading at around US$1.05 on Friday May 6, near its lowest level since the start of 2017.

Worries from MLIV readers underscore the European Central Bank’s political headache as it seeks to ease creeping price pressures without killing the business cycle, with 40% of respondents fearing a recession in the region more than the inflation and the same proportion worrying about stagflation.

As the dispute between the European Union and Russia rages over gas payments, there is a lack of consensus among survey respondents as to which side should suffer the most. While 51% said the Kremlin would ultimately fare worse, 49% cited Europe as the main loser.

With the common currency bloc’s proximity to the Russia-Ukraine conflict and its reliance on cross-border trade, Europe is at the epicenter of global concerns about rising prices and slowing economic growth. The eurozone grew just 0.2% in the first quarter, as Italy contracted, France stagnated and expansion in Spain slowed. Factory production and new orders fell and business confidence evaporated.

When asked what would be the best trade to position for a possible recession this year, the most popular response was shorting the euro, followed by exposure to energy, either through equities or raw materials. Bund longs and cash came next, followed by gold and the dollar.

“If Ukraine gets worse, I guess Europe goes into recession,” Jamie Dimon, CEO of JPMorgan Chase & Co, told Bloomberg TV on May 4. “It may take a few quarters, but I guess.”

Economists tracked by Bloomberg cut their eurozone growth forecast for 2022 to 2.8% from 4.2% at the start of the year. Still, the risk of a recession is rising after Russia cut off the flow of gas to Poland and Bulgaria. Businesses and consumers in Europe face pressure as prices rise, while China extends lockdowns that cloud global growth prospects. There is huge uncertainty about the region’s outlook, such as the outcome of the war, Societe Generale CEO Frédéric Oudéa told Bloomberg TV on May 6. “Our central scenario, our economist’s central scenario, is more of a soft scenario. GDP landing than a recession,” Oudéa said.

The median FX forecast from professional forecasters is for the euro to recover to US$1.12 by the end of the year, with no banks surveyed by Bloomberg currently predicting the parity. ABN Amro Bank briefly pleaded the case in March, but revised its appeal up a few weeks later. Nomura Holdings previously warned that a victory for far-right candidate Marine Loe Pen in the French elections could drive the currency to parity. Citigroup strategists recently recommended 3-month Euro-Dollar put options, while options markets imply about a 35% chance of this happening within the next 6 months.

Euro weakness is partly down to dollar strength, but now that Federal Reserve Chairman Jerome Powell has downplayed the prospect of a 75 basis point hike, the US currency may be starting to look overbought . Meanwhile, movements in currency hedging costs may soon make it more attractive for Japanese investors to hold Bunds rather than Treasuries, supporting the single currency. So while the dollar’s interest rate premium threatens to widen, the exchange rate hinges on expectations. And there remains a bullish case for the euro to rebound this year: US monetary policy tightening will ultimately prove insufficient to further boost the dollar – just as the ECB will potentially start raising rates as early as July. All of this can support the single currency, while leveraged funds also reduce bearish bets.

If this bullish roadmap materializes, it would justify the 20% of respondents who see the Euro first reaching parity rather than the US$1.10 level – then bouncing back to US$1.15 instead of falling any further.

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  • As Stagflation Threat Rises, Most Forex Traders See Euro-Dollar Peer In Survey
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