Euro hangs on to parity ahead of US inflation figures

While stocks remain almost unchanged across Europe on Wednesday, the euro is hovering just above parity against the dollar as investors await the highly anticipated US inflation report later in the day.

Most movements in the FX market felt insubstantial in the run-up to the release of the US inflation data for June, which is expected to have accelerated by 8.8% annually, marking a 40-year high.

A high inflation print is likely to be interpreted by the US Federal Reserve as a sign that the bank needs to continue increasing interest rates aggressively to curb surging prices, even if this might cause the economy to enter a recession.

The Fed is not the only central bank taking such action to confront the accelerating inflation worldwide. In response to global inflation concerns, South Korea's central bank hiked rates by 50 basis points on Wednesday, the largest rise since it adopted its current policy system in 1999.

The New Zealand central bank also raised interest rates for the sixth time in a row on Wednesday. RBNZ raised the official cash rate (OCR) by 50 basis points to 2.5%, the highest level since March 2016. Even though speculations suggested the bank might soften its hawkish outlook given alarming declines in business and consumer confidence and accelerating house price declines, the bank indicated it was comfortable with its aggressive tightening plan to curb rising inflation.

The European Central Bank has pledged to raise interest rates at its next meeting later in July. However, sentiment in the region is fragile amid fears of worsening the region's energy crisis. This is because the biggest pipeline carrying Russian gas to Germany has started 10 days of annual maintenance. 

It appears that the euro may plunge below its 200-day moving average against the pound after falling below parity with the Swiss franc last month.

Traders are worried that the euro may be forced to levels unseen for decades if US inflation data is reported sky-high, as the US dollar could continue to appreciate if US CPI appears higher than expected.

With gas rationing likely this winter, the German Economic Sentiment indicator, compiled by ZEW, fell Tuesday to the lowest level in eleven years. 

A number of countries in the Eurozone are also due to release inflation data on Wednesday, such as Germany, Spain and France. Consumer prices are expected to remain elevated in the Eurozone at this time.