“Is all the bad news not already in the price? We would strongly argue it is not,” Nomura

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The Euro to Dollar exchange rate has fallen heavily in 2022 and although factors like U.S. economics and Federal Reserve (Fed) policy have been significant driver of this decline, it’s the growing cost of energy supply disruptions that gives most confidence to some of the market's more bearish forecasters.

Europe’s single currency gained respite throughout much of the recent week after falling back below parity with the Dollar during the Monday session but European gas prices remained at stratospheric levels following a days long period of monstrous increases.

It’s these costs and the impact they’re expected to have on companies and households alike that leads some forecasters to feel confident that a more-than 18 month decline by the Euro may still have some way to go.

“The price of Germany's electricity over the next year has climbed over $1000pb in Brent oil energy equivalent terms. This is far from normal. It’s a crisis that stems not only from restrained energy supply from Russia but a series of unfortunate issues,” says Jordan Rochester, a strategist at Nomura.

Above: Euro to Dollar rate shown at daily intervals with futures price for UK & Dutch natural gas.

“In addition to energy restraints, the euro area is facing the full brunt of climate change with flash floods and record droughts, combined with slowing trade with China and US recession risks. However, we think the bigger challenge Europe will face this winter is not inflation, but stagflation. Altogether it’s why we expect EUR/USD to fall to 0.90 this winter,” Rochester said on Friday.

European gas prices rose by large double digit percentages over the last week after Russia’s state gas monopoly said it would halt supplies through an important pipeline for a three day period in September, further squeezing an already tight market.

The economic burdens these price rises create could be likely to remain headwinds for the single currency in the absence of credible supply side answers from European capitals to the in progress Russian gas diplomacy.

“These unfathomable price rises are adding pressure on European leaders to come up with a solution for the unfolding energy crisis that will stress many households,” says Bas van Geffen, a senior macro strategist at Rabobank.

Above: Euro to Dollar rate shown at monthly intervals with Fibonacci retracements of new millennium uptrend indicating possible areas of technical support for the Euro. Includes futures price for UK & Dutch natural gas.

“US households are struggling to pay their utility bills. Yet, this situation pales in comparison to the price hikes that European consumers are facing,” van Geffen said in a Friday market commentary.

The rising cost of European energy supplies has driven a deep decline in many financial model derived estimates of the single currency’s fair value this year and with little respite in sight, some of the more bearish forecasters around the market are feeling optimistic about their projections for EUR/USD.

Both Rabobank and Nomura have forecasts that envisage a sustained break below parity by the Euro-Dollar rate over the coming months.

“Is all the bad news not already in the price? We would strongly argue it is not. Based on our assumptions, EUR/USD is likely to fall to 0.90 this winter with its terms of trade shock pointing to 1980s levels of 0.65 as a possibility,” Nomura’s Rochester in a Friday research briefing.

“Is 0.65 too extreme? Perhaps yes if Europe’s terms of trade were to eventually improve with lower energy prices. But if prices remain extreme over this winter and the next, then it becomes a lot more difficult for EUR to climb back above parity to the USD,” he added.