A proactive European Central Bank (ECB), recent yield surges with inflation and growth concerns are heightening “fragmentation” risks for indebted nations and will pressure EUR, according to economists at Westpac. They highlight that the EUR/USD pair could slide towards parity.

ECB needs to address the risks of “fragmentation”

“Higher debt servicing will exacerbate the cost of living crisis and broader inflation pressures from the conflict in Ukraine.” 

“Eurozone dependency on Russian energy is acute in Germany but also across indebted periphery and southern nations, notably Italy and Greece. Consequently, ECB needs to address the risks of spread widening (or ‘fragmentation’) destabilising the eurozone. ECB has called on internal committees to draw up new instruments for ECB to consider.” 

“EUR/USD is now vulnerable as it threatens to test 1.0340-50 (lows of past 7 years) amidst risk of sliding towards 1.01 if not parity, EUR needs to regain levels above 1.0550 to reduce current downside risks.”