Euro bounces back towards parity

The Euro surged by over 200 points against the greenback in last Friday’s trading session after a mixed bag of results from the latest Non-farm payrolls data from the US but many analysts expect the rally to be short lived as old wounds remain intact

Divergence between Federal Reserve (Fed) and European Central Bank (ECB) regarding interest rates is one factor to have recently weighed heavily upon the Euro but the continuing rise of energy costs and the ongoing risk of energy supply disruptions caused by the war between Ukraine and Russia have been the biggest contribution to the single currency's losses.

Historic increases in energy prices have driven inflation higher all the while pressuring the economy and converted a once goods and services trade surplus into a gaping deficit that has seen more Euros sold on the market in exchange for Dollars and other currencies this year.

"Using our GSFEER model, we can more formally explore what a more permanent shift to higher import prices would mean for the currency, and specially the Euro’s fair value. As a result, we are nudging down our 3-month EUR/USD forecast to 0.94” noted Michael Cahill, and Isabella Rosenberg at Goldman Sachs.

"We are already seeing evidence that higher production costs are weighing on Euro area activity, with implications at least for the near-term outlook, and some concerning signs for the long-run production capacity," they added.

Looking ahead in today’s trading session, the main drivers of the EUR/USD currency pair will be the release of some key monetary speeches which kicks off with ECB president Christine Lagarde during the European session where investors will be looking for clues on future rate hikes.

During the American session market participants will await monetary talks from Federal Reserve members Susan Collins  Loretta Mester where the questions of interest rate hikes will also garner the interest of traders.