Future of the Euro

The European Union was created to bring prosperity, security and mutual cooperation between countries in the region. For many years it has succeeded in achieving all these beautiful goals, but today we see the situation is different. Not only a major member - the United Kingdom, left the Union, but the coronavirus pandemic and the current war close to the EU's borders have also a significant impact. The Union is not only stagnating, but is also struggling to cope with enormous inflation and the falling value of the euro.

The euro at second place

One of the most popular currencies for Forex trading is the euro, and it is the second most traded currency after the US dollar. The Euro has a tradition and is recognized in most European countries, in addition to being pegged to African countries due to the stabilization of exchange rates. The Euro is interested for many traders. In the past, we have seen that political actions within the Eurozone have led to higher volumes of Euro trades. This is especially the case for countries that saw a dramatic fall in local interest rates at the time of the euro's inception, such as Greece or Italy.

The acceptation of the currency has a large number of benefits for European countries, trade has been optimised, currency risk in cross-border investments has been eliminated for members with the same currency, and new financial capital coming in, raising economic levels. Thanks to the euro, investors from Germany and the Netherlands, for example, can take advantage of lower interest rates and lend financial capital to companies in other euro area countries without currency risk.

Approaching parity

Today we find ourselves in a different situation. Many citizens are wondering about the direction of the currency value and where is heading, as the whole region finds itself in a difficult situation. With the military conflict has come the energy threat and rising inflation. The middle class is beginning to disappear in Europe, and those on the lowest incomes are finding themselves on the brink of poverty. Of course, this situation is also affecting the value of the euro, with stagflation looming in Europe and experts arguing about the evolution of the currency. According to a new MLIV Pulse survey, the value of the euro may end up at the level of the dollar. 60% of respondents said they think the euro will enter a parity phase, with a small majority of the 400-plus survey participants predicting it will then return to $1.15. These days, the euro is trading at around 1.07 against the dollar. [1]

The development of the EUR/USD currency pair over the last 5 years. (Source: Investing)

An uncertain future

There is a huge question mark hanging over the Eurozone. High inflation, rising prices and slowing economic growth could bring a negative impact on the European currency later this year. Economic growth in the EU was only 0.2% in the first quarter, factory output and new orders have fallen, businesses are facing high costs and their confidence is waning. For the moment, the euro remains weaker as inflation in the Eurozone is at a record high and the pressure on the European Central Bank is palpable. ECB is trying to fight the recession and is taking the path of putting down high prices by slowly raising interest rates during 2022. We can just wonder about the future, if the ECB at least slow down the rise in prices in the near future, even if it is currently failing to do its job.

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[1] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or based on the current economic environment which is subject to change. Such statements are not guaranteeing of future performance. They involve risks and other uncertainties which are difficult to predict. Results could differ materially from those expressed or implied in any forward-looking statements.

*Past performance is no guarantee of future results.