A look at the day ahead in markets from Dhara Ranasinghe. After staring parity against the dollar in the face for day; the euro finally broke the key level to the palpable relief of traders who have been unable to take their eyes off that euro chart.
Chatter about whether it had already hit parity or whether the psychological milestone matters has been high. And with the euro already down almost 12% this year, a lot of bad news is priced in. But let’s face it, milestones matter; the last time the euro traded below $1 was two decades ago and policymakers are likely paying attention.
The Bank of Canada has already paved the way; it delivered the first 100 basis point rate increase among the world’s advanced economies in the current policy-tightening cycle.
Expectations for even steeper U.S. rate hikes that could slow growth sharply have pushed the U.S.; yield curve further into inversion territory. According to Deutsche Bank, the 2-10 yield curve is at its most inverted it’s been at any point in this cycle.
The ECB will likely kick off its rate-hiking cycle with a 25 bps point increase next week and its room for maneuver; it is already seen limited given concerns that the energy price shock raises recession risks for the euro area. Speculation about a steep U.S. rate hike when the Fed meets later in July are keeping world stocks on the defensive meanwhile. Asian shares were pinned at two-year lows, while European and U.S. stock futures were pointing down.