Spectrum FX Daily Report

EUR/USD falls to parity - or did it?

Summary:

• EUR/USD falls to barely above parity, but wall of options prevents a breakthrough.
• The common currency recovered during London trading. German (am) and US (pm) inflation figures could be catalysts for fresh move to 1.0000.
• GBP falls to fresh two-year lows on the US dollar amid ongoing UK political uncertainty. Next Tory leader won't be known until 05/09. Government blocks Labour attempt to hold vote of no confidence.

The euro effectively fell to parity against the US dollar on Tuesday, although it found decent support yesterday afternoon, and by the end of the London session EUR/USD was trading higher than where it began it.

There was actually a bit of confusion among market participants as to whether the milestone of parity had been reached. Firstly, the decentralised nature of the FX market, and the use of a different sample of banks when calculating exchange rates, can create minor variations in rates between providers. This led to slight discrepancies in parity timing among rate providers - Refinitiv showed 1.0000 at approximately 9:20am on Tuesday, with Bloomberg appearing to do the same at around 10:45am. While much of the market was proclaiming parity had been struck, the major news outlets were, however, reporting an official low later in the day of 1.00005 - a whisker above the key psychological level.

In reality, the common currency is still trading at its lowest level since December 2002, and as near as makes no difference at a 1:1 exchange rate with the US dollar. A wall of options contracts appear to have been enough to officially prevented parity for now, although it remains to be seen whether this line in the sand can hold given current sentiment towards the European economy, particularly amid the heightened risk of a cut off in Russian gas supplies to Europe.

Indeed, we may need to see a catalyst to breakthrough parity levels in the coming days - today’s German and US inflation figures may be potential candidates. Should we see signs of a divergence in the data, then parity could be possible on Wednesday, although evidence of a stabilisation in the latter could be enough to trigger a retracement in the recent dollar rally.

With all eyes on the euro yesterday, it would have been easy to miss that sterling also fell to its weakest position on the dollar in two years. Political uncertainty is beginning to be reflected in a weaker sterling, as markets prepare for a potentially prolonged Tory leadership contest. Nominations for the next Conservative leader have now closed, although the winner won’t be announced until for almost two month (5th September). Rishi Sunak, Penny Mordaunt and Liz Trust are now the front-runners according to bookmakers, although until the next leader becomes clear, we may continue to see a bit of fragility in the pound, as possible policy implications will be unknown. Next up for sterling will be the monthly UK GDP figures for May (out this morning). A reading in contraction territory would raise alarm bells about the possibility of a UK recession, and could provide an additional drag on GBP.

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