August 22, 2022 01:17 AM ET
By: AnalysisWatch
In early European trading Monday, the EUR/USD was trading above parity, with the U.S. dollar taking a back seat amid renewed optimism about China's faltering economy.
The People's Bank of China (PBOC) cut the prime lending rate (PLR) to support credit expansion and economic growth, easing risk pressure and fueling a pullback in the safe-haven U.S. dollar across the country. The U.S. dollar index retreated from a five-week high of 108.29 to trade at 108.10 at press time.
Despite the latest rise, downside risks remain intact for the major currency pair amid belligerent Fed expectations and a worsening gas crisis in Europe. The Fed is expected to raise policy rates by 50 basis points in September amid concerns about growth and signs of peak inflation. However, the monetary policy tightening cycle is expected to continue in the coming months as inflation is not expected to decline anytime soon.
Meanwhile, a recession in Germany is inevitable as the European gas crisis worsens. Russia's Gazprom announced on Friday that its Nord Stream 1 pipeline would be shut down from August 31 to September 2, as one of the pipeline's compressors requires maintenance. The German industrial sector is likely to be hit hard by the reduction in gas supplies due to the war between Russia and Ukraine.
The pair now awaits the monthly economic report from the German Bundesbank, amid a light economic calendar on both sides of the Atlantic. On Tuesday, the preliminary S&P Global Manufacturing and Services PMIs from the Eurozone could have a significant impact on the common currency, while the dollar awaits the Jackson Hole Symposium, scheduled for the second half of this week.
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