EUR/USD Price Prediction – Euro Drops To 20-Year Lows

Key Insights

• The U.S. Dollar Index rallied to 20-year highs amid demand for safe-haven assets.
• The European currency is under strong pressure as traders worry that high energy prices will crush the EU economy. 
• EUR/USD continues to slide towards the key 1.0000 level. 

U.S. Dollar Rallies Against Euro

EUR/USD moved to 20-year lows at 1.0250 amid worries about the health of the European economy.

European natural gas prices have tested multi-month highs ahead of the planned maintenance of the Nord Stream I pipeline. EU fears that Russia may not restart supplies via the pipeline after maintenance ends on July 21.

Meanwhile, the European economy is already suffering from high energy prices. Uniper, which is Germany’s main importer of Russian gas, has already asked for a bailout.

Germany and other European countries have found themselves in a challenging situation as they need to store supplies for winter at a time when Russia cuts supplies. The European economy will get damaged, and the only question is the size of this damage.

Not surprisingly, traders rushed to the safety of the U.S. dollar. The U.S. Dollar Index, which measures the strength of the U.S. dollar against a broad basket of currencies, settled above multi-year highs at 105.80 and moved to 106.50. The American currency has not been that strong since 2002.

Eurozone Bond Spreads Increase

Strong demand for safe-haven assets provided support to the prices of government bonds. As a result, the yield of 10-year Treasuries declined to 2.82%. Meanwhile, the yield of 10-year German government bonds decreased to 1.21%.

It should be noted that demand for the safe German bonds has greatly exceeded demand for bonds of weaker EU members like Italy. The spread between the bonds of strong EU members and weak EU members has widened despite ECB efforts to cut it. This is an additional problem for the eurozone.

At this point, it looks that EUR/USD is ready to move towards the psychologically important 1.0000 level. The problems of the European economy are too big to ignore, and the situation will likely get worse before it gets better.

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