Euro teeters on the brink of parity with the U.S. dollar on recession fears

A financial trader monitors data on computer screens as a desktop television shows euro currency banknotes at the Frankfurt Stock Exchange in Frankfurt, Germany.

Martin Leissl | Bloomberg | Getty Images

The euro hovered close to parity with the U.S. dollar on Tuesday, as the euro zone’s energy supply crisis and economic woes continue to depress the common currency.

The euro was trading 0.3% lower around $1.0007 at 9:35 a.m. London time on Tuesday morning.

Fears of a recession have grown in recent weeks due to rising uncertainty over the bloc’s energy supply, with Russia threatening to further reduce gas flows to Germany and the broader continent.

The prospect of a starker economic slowdown has also cast doubt over whether the European Central Bank will be able to tighten monetary policy aggressively enough to rein in record-high inflation without deepening the economic pain.

“It is a key and obvious psychological level which is very much under threat here,” Jeremy Stretch, head of G-10 FX strategy at CIBC Capital Market, told CNBC’s “Street Signs Europe” on Tuesday.

Stretch said the prospect of the euro falling below this level was a reflection of burgeoning recession fears across the euro zone. It comes amid growing concerns about the prospect of a permanent cut to Russian gas supplies and the ECB’s slower pace of monetary policy tightening when compared to other major central banks.

“The ECB is in a very, very difficult position. You could argue that the ECB has been rather late to the party both in terms of ending their bond purchases but also considering monetary policy tightening,” Stretch said.

He added while the ECB “clearly missed a trick” at its last meeting, inflation expectations over the medium term had retreated toward the central bank’s target threshold.

“That is one sign that perhaps over the medium to longer run those inflation expectations are not necessarily becoming materially deanchored, but clearly from an ECB policy signaling perspective … the need to act and to act expeditiously is clear,” Stretch said.

This is a developing news story and will be updated shortly.