The Specter of Stagflation Threats the Euro to Fall Below Parity

The euro exchange rate slumped due to various complications resulting from the Russo-Ukrainian war. On the other hand, safe haven assets are traders' favorite choices.

The euro is facing its worst time in about ten days. EUR/USD is on the hunt for a rebound as the news is written (7/March), but is still contained near the crucial psychological mark of 1080. EUR/CHF even slipped below parity for a moment and scored a multi-year low at 0.9971.

EUR/USD Daily chart via TradingView

Europe proved to be the third region most affected by the Russo-Ukrainian war. Armed conflicts trigger various uncertainties such as the threat of a nuclear disaster and the risk of World War III. Meanwhile, severe international sanctions have torn apart the Russian economy, while increasing the threat of a European economic slowdown.

This situation has resulted in the price of oil and gas and precious metals soaring rapidly. Brent and WTI crude oil prices have now reached USD 128 and USD 125 per barrel, respectively. In fact, the global economy is still struggling with an increase in the inflation rate which has not been resolved since the pandemic.

Europe imports about 40 percent of its natural gas needs and 25 percent of its oil needs from Russia. As a consequence, a unique correlation has now emerged where "the more expensive the oil price, the cheaper the euro exchange rate". Europe is also threatened with an economic slowdown or even stagflation.

The euro exchange rate slumped because of these complications. On the other hand, safe haven assets are traders' favorite choices. The Single Currency is at risk of falling further below parity (1,000) versus the Swiss franc, unless the European Central Bank (ECB) and/or Swiss (SNB) intervene specifically to prevent this.

"The (jump in oil prices) increased demand for the dollar and Swiss franc this morning," said an FX strategist interviewed by Reuters, "The boom in commodity prices increases the risk of a stagflationary shock for the Eurozone and complicates the policy outlook for the ECB."

Goldman Sachs assesses that a sustained increase in oil prices of USD 20 will suppress real economic growth by 0.6 percent in the Euro area and 0.3 percent in the United States. A worse scenario could also occur if Russia restricts gas shipments to Europe via Ukraine, as Eurozone GDP has the potential to fall by as much as 1 percent.

Market participants will monitor the results of this week's ECB meeting to find out the opinions of top European officials on how far the impact of the Russo-Ukrainian war will be on the economy and monetary policy going forward. Meanwhile, some traders have lost hope for an increase in the ECB's interest rate for the next few years.