Markets remained firmly rooted to the concept of slowing economic growth last week, as equities slipped slightly whilst eurozone government bonds saw positive returns to consolidate a strong couple of weeks in general. The further weakness of the euro currency versus the dollar was evidence of short-term nervousness from investors.
The EUR/USD reached parity for the first time in two decades. Some of the main variables at play are familiar ones. The dollar’s status as the global reserve currency and a safe haven of choice has been experienced at various key market junctures for many years. The eurozone economy is also forecast to be impacted by the continuing war in Ukraine from several perspectives which have been well documented. Last week’s US inflation print (more info below) also suggests that, whilst ECB policy will converge towards the Fed’s (i.e., get tighter) over the rest of the year, the Fed might move quicker over the rest of the summer.
All of this puts pressure on the euro and strengthens the dollar (at least in the short term). It will be interesting to see how this affects the earnings of US domiciled corporates over the second half of 2022, as overseas earnings that are repatriated back to the US convert to less dollars. We’ll get some guidance this week, with a packed Q2 earnings calendar ahead.