Markets fear the energy crisis will push the Eurozone into recession


The euro remained under pressure for most of yesterday and teetered on the brink of parity against the US dollar.

There are a number of reasons why the euro has weakened significantly but the most recent cause is the fear of an energy crunch in the Eurozone. The Nord Stream 1 pipeline, which brings gas from Russia, was shut down on Monday for annual maintenance due to last for ten days. Speculation is rife that Putin might prolong the outage as retaliation for the sanctions imposed by the west on the Kremlin after the invasion of Ukraine in February. Some of the bigger EU member states such as Germany and Italy are highly reliant on Russian gas and despite efforts to stockpile energy and find alternative suppliers, currency traders are assuming the worst. Their main worry is that the energy crunch will tip the Eurozone into recession.

The European Central Bank is expected to raise interest rates this month for the first time in ten years when they meet next Thursday. However the market does not appear to have confidence in the ECB as inflation currently runs at 8% and interests at least for now remain negative. The ECB will have its credibility tested come next week when the market will look for an aggressive hike to signal the bank’s commitment about bringing down inflation.


Although euro weakness is attributed to losses against the dollar, it’s not all to do with euro weakness. USD continues to draw its strength from safe-haven flows and is still being the globe’s main reserve currency of choice.

There are plenty of reasons why USD continues to be favoured – war, inflation and the prospect of fresh measures in China to combat the Omicron variant of Covid-19 allow the dollar to remain strong. Additionally, the US is further on the way to a better economic recovery since the pandemic than its European counterparts. An hawkish Federal Reserve and strong economic US data will keep supporting the dollar.


The pound was lifted this morning against both the euro and dollar after UK GDP growth surprisingly grew by 0.5% in May, after a decline of 0.2% in April. Growth was fuelled by a surge in holiday bookings and GP appointments, whilst services, manufacturing and construction all posted positive growth with services output being the largest contributor. All of this pushing up monthly GDP to 1.7%, above its pre-pandemic levels.

Key announcements

07:00 – GBP – UK GDP – forecast 0.1% vs actual 0.5%
10:00 – EUR – EU Economics data
13:30 – USD – US CPI m/m – forecast 1.1%
13:30 – USD – US Core CPI m/m – forecast 0.5%