Is EUR/USD parity a big deal?

FRANFURT (July 12)  EUR/USD continues to capitulate in the European session and looks set to hit 1.00. The clear divergence between the Fed and ECB has shown that the two economic powerhouses are in very different situations leading into the next few months. The ECB has to worry about interest rate increases leading to a further strain on the pocket of its people as the cost of living continues to rise. Although the U.S. has a similar problem recent economic indicators show that the economy in America could handle rate increases better than some of the other major nations.

The drop in the euro also adds to the inflation woes we must not forget. Most of the major commodities in the world are bought in U.S. dollars and the fact that the euro is getting weaker and weaker does not help the inflation issue in the coming months. In addition to this, China has been dealing with another wave of COVID-19, and Russia has threatened to ban gas exports to some of Europe's major nations. The ECB is not stuck between a rock and a hard place. Some analysts have suggested an economic slowdown in the U.S. is the only answer to the problems Europe faces as it could force the Fed back into easing its economic policy. One thing is for sure it looks like happening in Europe before the U.S. right now.

Below is the monthly chart of EUR/USD. It is being used to highlight we have been in this situation before. Around the year 2000, the pair hit parity before going on a mammoth uptrend. On the monthly chart, the trends do seem very pronounced. This new wave of lower highs and lower lows looks like it has legs and the green and black support areas could be targeted once more. The biggest level of support is in fact at 0.83710 and this price zone has had the biggest reaction on the chart. Ahead of this, the green line at 0.9548 could be sticky as it was back in the early 2000s. Either way, the next few months look very interesting and all eyes are on the Fed vs ECB debate.

REUTERS