The dollar breaks through; more to come?

The US dollar has continued to surge this week, with the key EUR/USD rate breaching a two-decade low and approaching the symbolic parity level as fears around Europe’s energy supply worsened. Solid US data, in particular today’s stronger-than-expected payrolls, and continued hawkish rhetoric from FOMC officials reinforced the growing divergence between the increasingly bleak outlook in Europe and the more resilient US economy. With little relief on the horizon for Europe, and next week’s US inflation data likely to mark a new high for the year and keep the Fed hiking aggressively in the near term, we think the risks remain skewed in favour of the greenback. Indeed, as we discussed yesterday, we think the EUR/USD rate will break through parity before long, and may well trade some way through that level.