The EUR was doing very poorly until the US announced a student loan forgiveness package. The dollar plummeted on the news because it appears the administration is throwing huge amounts of fuel onto the inflation crisis. It’s a two-sided coin with the forgiveness costing the government $300 billion yet easing some short term financial challenges for some Americans. While the intent is worthy, this is something where the FED’s inflation fighting tools may not help much.
Switching over to the long term picture, North American natural gas prices have reached their highest levels since 2008. Because the U.S. is now a huge exporter of natural gas (we were an importer in 2008), the rise in prices changed the trade deficit/surplus equation in Europe. At current prices, Europe is going from a trade surplus to a trade deficit with the world (broad based EUR negative). Looking at the EURUSD specifically, this could potentially put the EUR bloc into a trade deficit with the United States. This (which incorporates the Ukraine situation) along with the fact that US has higher interest rates than Europe are the primary fuel of the EUR’s decline. The catch is that gas prices can plunge (if Russia gets out of Ukraine), so the change in fundamentals could end at any time.
Looking at the chart, we examined the last 25 years because it is relevant at the moment. The key item is the purple line. This is basically .96 USD per EUR. Unless the FED slows its fight against inflation, which was made less likely by the student loan announcement or the ECB gets more aggressive in fighting inflation (which they should but will they?), then I think a test of .96 is likely.
From our partner Corey Jones at GPX Capital Market