EUR/USD hits parity as short-term rate differentials widen

The euro-dollar pair () achieved parity today, an occurrence not seen in nearly two decades (November 2002), as a fresh energy crisis in Europe threatens the onset of a recession.

It's been a rough year for the euro, losing nearly 11% of its value versus the dollar since January and 15% over the last 12 months.

The short-term (2-year) bond yields divergence between the US and Europe continues to widen, as the market anticipates that the Federal Reserve and the European Central Bank will continue to pursue distinct monetary policy paths.

The yield on a 2-year is 2.6 percentage points (260 basis points) higher than Germany's yield on the same maturity (), the largest spread since the start of the year.

The upbeat data on the U.S. job market that was released on Friday cemented analysts' expectations of a further 0.75-percentage-point hike by the Federal Reserve in July, propelling the dollar's broad strength.

The exceptional resiliency of the U.S. job market has bolstered the convictions of an aggressive Federal Reserve. in the United States increased much more than predicted in June (up 372k vs. 265k consensus), the stayed at historically low levels of 3.6%, and wages continued to climb at a solid clip. It implies that the labour market is still exceptionally tight and that the US economy is not yet in a phase of demand contraction, implying the need to persist with interest rate rises at a quick pace.

Even though the 14-day RSI continues to show oversold levels, from a technical point of view, widening US-Europe rate differentials, reflecting differing monetary trajectories by the Fed and ECB, might continue to exert downward pressure on the pair in the near future.

Idea written by Piero Cingari, forex and commodities analyst at Capital.com