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Euro falls to brink of parity with dollar over fears Russia will cut off gas supplies – business live | Business

Introduction: euro on brink of parity with the dollar

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

All eyes are on the euro this morning, as the single currency falls to the brink of parity with the US dollar for the first time in two decades.

Anxiety over poor European growth, and rising fears that Russia might turn off gas supplies are weakening the euro.

The euro dropped as low as $1.0006 against the dollar in early trading today, a new 20-year low, compared with above $1.13 at the start of this year.

The euro/dollar exchange rate over the last 20 years Photograph: Refinitiv

Russia turned off the single biggest pipeline carrying gas to Germany on Monday for annual maintenance. That work is expected to last for 10 days, but governments, markets and companies are worried the Nord Stream 1 shutdown might be extended because of the war in Ukraine.

If Vladimir Putin decides to turn off gas supplies to Europe this winter, countries such as Germany could face gas rationing — potentially forcing industries to suspend work and leaving families struggling to heat their homes.

Fiona Cincotta, senior financial markets analyst, at City Index, says:

Fears are rising that Russia may not switch the gas supply back on in 10 days when the works are over. This could cause a recession in Europe.

CHART OF THE DAY: And Germany counts the days.

Nord Stream 1 pipeline has stopped shipping Russian gas into Germany (just a residual amount still flowing now). It’s annual maintenance, scheduled from July 11 to July 21.

Berlin fears the pipeline may never return into service. pic.twitter.com/HCdagmIbGs

— Javier Blas (@JavierBlas) July 11, 2022

Robert Habeck, Germany’s economy minister, warned on Saturday of the ‘nightmare scenario’ of a permanent halt to the flow of Russian gas.

“Everything is possible, everything can happen,” Habeck told the broadcaster Deutschlandfunk:

“It could be that the gas flows again, maybe more than before. It can also be the case that nothing comes.

“We need to honestly prepare for the worst-case scenario and do our best to try to deal with the situation.”

Surging energy prices and supply chain disruption due to the Ukraine war had already threatened to push Europe into a recession.

Investors are also concerned that a growing number of Chinese cities, including the commercial hub Shanghai, are bringing in new restrictions to combat outbreaks of the highly-transmissible Omicron subvariant, BA.5.

The dollar is benefitting from that uncertainty, plus concerns that US inflation could hit a new 40-year high on Wednesday.

That could prompt more aggressive interest rate rises, strengthening the US currency, especially after a better-than-expected American jobs report last Friday that calmed recession worries..

The agenda

  • 9am BST: Bank of England deputy governor Jon Cunliffe: Speech on crypto market developments at the British High Commission, Singapore
  • 10am BST: ZEW survey of eurozone economic confidence
  • 11am BST: NFIB US Business Optimism index for June
  • 6pm BST: Bank of England governor Andrew Bailey: Speech at OMFIF ‘The economic landscape’

Key events:

Filters (BETA)

The euro is teetering ever closer to parity with the dollar.

It’s now trading at just $1.0005, on concerns that the shutdown of the Nord Stream 1 gas pipeline for maintenance could become permanent.

The euro vs the US dollar this month
The euro vs the US dollar this month Photograph: Refinitiv

Mark Haefele, chief investment officer, UBS Global Wealth Management, says:

“While we believe that a cessation of Russian gas supply to Europe is a real possibility, one that would cause a Eurozone-wide recession with three consecutive quarters of economic contraction, there are also good reasons to assume that gas supplies will resume after the maintenance.”

Pound hits two-year low

The pound has dropped to a fresh two-year low against the dollar this morning, weighed down by political uncertainty and economic gloom.

Sterling weakened to $1.185 this morning, the lowest since March 2020, as the race to replace Boris Johnson steps up, with many candidates promising tax cuts.

The Conservative Party’s 1922 Committee set out the timeline for selecting a new Conservative leader and PM last night, and aim to announce the winner on 5 September.

Adam Cole of RBC Capital Markets says;

As expected the Committee set a relatively high threshold of 20 for the numbers of MPs needed to “sponsor” each candidate and as a result, several of the 11 that have so far declared themselves as candidates are likely to drop out quickly. Successive voting rounds amongst Conservative MPs are expected to cut the list down to the final two candidates before parliament goes into summer recess (next Thursday).

The final vote (amongst all Conservative Party members) is expected on September 5. The bookmakers currently have Sunak as favourite (31% probability), followed by Mordaunt (29%) and Truss (20%).

Markets are likely to see Sunak as the fiscally conservative candidate, with the immediate tax cuts promised by most of the other candidates putting some upward pressure on rates if their prospect of winning continues to rise.

Deutsche Bank: Russian gas uncertainty may linger until August

Deutsche Bank fears uncertainty over Russia’s gas supplies to Europe will linger into next month.

DB’s strategist Jim Reid told clients this morning that there are ‘significant jitters’, as the Nord Stream pipeline below the Baltic Sea begins its scheduled 10-day maintenance.

European natural gas futures (-6.10%) did come down yesterday after rising for four consecutive weeks, thanks to the news at the very end of last week that Canada would return a turbine for the Nord Stream pipeline after their government issued a “time-limited and revocable” permit that removed it from sanctions.

That said there are still significant jitters as to whether the pipeline will be turned back on again after the maintenance concludes, which meant that the Euro itself fell even closer to parity against the US Dollar.

[That turbine would help Nord Stream 1 to run at full capacity]

The euro weakened to near parity as markets face up to the prospect of what a full cut-off of Russian gas would mean for the European economy, Reid adds:

Speaking to DB’s Peter Sidorov yesterday, he tells me that the ambiguity over gas may linger as even if Russia did need this turbine part to restore stronger gas flows, the technical logistics may mean it would take an extra week or two to integrate into the pipeline.

So the uncertainty may linger until early August.

The euro’s weakness could spur the European Central Bank to raise interest rates later this month, for the first time since 2011.

That would help it catch up with other central banks, including America’s Federal Reserve, and the Bank of England, who have already begun to lift borrowing costs to fight inflation.

But… the ECB will struggle to raise rates as fast as the Fed, even though eurozone inflation is a record high of 8.6%. That’s due to recession fears and the risk of ‘fragmentation’ (widening the cost of borrowing between stronger and weaker members, as happened in the eurozone debt crisis).

Mohit Kumar of investment bank Jefferies explains:

We expect the euro to go towards parity and beyond given the diverging stance between the Fed and the ECB.

European stock markets are set to open lower, as worries about growth and potential disruption to gas supplies weigh on markets.

EUROSTOXX 50 FUTURES DOWN 0.9%, DAX FUTURES DOWN 0.9%, FTSE FUTURES DOWN 0.6%, IBEX FUTURES DOWN 0.85%

— *Walter Bloomberg (@DeItaone) July 12, 2022

The next few weeks could be challenging for Europe, with possibly maximum uncertainty stretching into August, warns Stephen Innes, managing partner at SPI Asset Management.

Investors increasingly believe that gas may not start to flow through Nord Stream 1 again following the scheduled maintenance on July 11-21, with further ‘temporary’ interruptions seen as likely.

If so, Germany will probably be forced to go to stage 3 of the gas emergency plan sometime in August, meaning rationing and forced closure of chemical and other production parts, which could shave a few percentage points off German GDP.

Euro at 20-year low, to within one cent of parity with the dollar. High inflation and the prospect of an energy shortage—should Russia cut off Europe’s gas supply this winter — raise prospect of recession. Euro was trading at around $1.15 in February

— Andrew Neil (@afneil) July 12, 2022

Introduction: euro on brink of parity with the dollar

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

All eyes are on the euro this morning, as the single currency falls to the brink of parity with the US dollar for the first time in two decades.

Anxiety over poor European growth, and rising fears that Russia might turn off gas supplies are weakening the euro.

The euro dropped as low as $1.0006 against the dollar in early trading today, a new 20-year low, compared with above $1.13 at the start of this year.

The euro/dollar exchange rate over the last 20 years
The euro/dollar exchange rate over the last 20 years Photograph: Refinitiv

Russia turned off the single biggest pipeline carrying gas to Germany on Monday for annual maintenance. That work is expected to last for 10 days, but governments, markets and companies are worried the Nord Stream 1 shutdown might be extended because of the war in Ukraine.

If Vladimir Putin decides to turn off gas supplies to Europe this winter, countries such as Germany could face gas rationing — potentially forcing industries to suspend work and leaving families struggling to heat their homes.

Fiona Cincotta, senior financial markets analyst, at City Index, says:

Fears are rising that Russia may not switch the gas supply back on in 10 days when the works are over. This could cause a recession in Europe.

CHART OF THE DAY: And Germany counts the days.

Nord Stream 1 pipeline has stopped shipping Russian gas into Germany (just a residual amount still flowing now). It’s annual maintenance, scheduled from July 11 to July 21.

Berlin fears the pipeline may never return into service. pic.twitter.com/HCdagmIbGs

— Javier Blas (@JavierBlas) July 11, 2022

Robert Habeck, Germany’s economy minister, warned on Saturday of the ‘nightmare scenario’ of a permanent halt to the flow of Russian gas.

“Everything is possible, everything can happen,” Habeck told the broadcaster Deutschlandfunk:

“It could be that the gas flows again, maybe more than before. It can also be the case that nothing comes.

“We need to honestly prepare for the worst-case scenario and do our best to try to deal with the situation.”

Surging energy prices and supply chain disruption due to the Ukraine war had already threatened to push Europe into a recession.

Investors are also concerned that a growing number of Chinese cities, including the commercial hub Shanghai, are bringing in new restrictions to combat outbreaks of the highly-transmissible Omicron subvariant, BA.5.

The dollar is benefitting from that uncertainty, plus concerns that US inflation could hit a new 40-year high on Wednesday.

That could prompt more aggressive interest rate rises, strengthening the US currency, especially after a better-than-expected American jobs report last Friday that calmed recession worries..

The agenda

  • 9am BST: Bank of England deputy governor Jon Cunliffe: Speech on crypto market developments at the British High Commission, Singapore
  • 10am BST: ZEW survey of eurozone economic confidence
  • 11am BST: NFIB US Business Optimism index for June
  • 6pm BST: Bank of England governor Andrew Bailey: Speech at OMFIF ‘The economic landscape’

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