Euro hovers above parity before U.S. inflation data

European stock markets were in the red and currency markets were calm in early European trading, with the dollar index up by around 0.1% at 108.33.

The euro was down 0.2% on the day at 1.00375 at 0804 GMT.

On Tuesday, it had dropped as low as $1.00005 on the most widely used Electronic Broking Services’ (EBS) dealing platform and touched $1 on Reuters dealing overnight.

Market-watchers were focused on U.S. CPI data due later in the session. Economists forecast headline U.S. inflation accelerated to 8.8% year-on-year in June, a four-decade high.

But “core” CPI, which strips away volatile food and energy prices, is expected to repeat May’s 0.6% monthly increase and cool slightly to 5.7% year-on-year.

Higher-than-forecast inflation would reinforce expectations of Federal Reserve interest rate hikes and push the dollar higher – potentially causing euro-dollar to break parity, analysts said.

But traders will be looking for any signs of inflation having peaked, as this could potentially convince the U.S. central bank not to become more aggressive in its future rate hikes.

The euro is down nearly 12% this year and fell to a 20-year low on Tuesday, as the war in Ukraine has triggered an energy crisis that has hurt the continent’s growth outlook.

Germany has moved to stage two of a three-tier emergency gas plan and warned of a recession if Russian gas flows are halted.

“I see relative recession risks as the primary driver of the drop towards parity – Dutch gas futures are up 100% over the last month, U.S. gas futures are down 35%. This is a clear negative for euro zone growth and is dragging the euro lower,” said Colin Asher senior economist Mizuho.

Derek Halpenny, head of research at MUFG, said in a client note that risk-off market moves due to increased global recession risks have “further to run”.

“We doubt that is the end of the move and see little reason for the US dollar to turn weaker at this juncture,” he said.

The euro was down by around 0.1% versus the British pound, with the euro-sterling pair having fallen 2% so far this month.

“The market’s treating the euro zone as worse off than the UK when it comes to the gas flow,” said Jordan Rochester, FX analyst at Nomura.

The pound was up 0.2% versus the dollar at $1.19055.

Britain’s economy expanded unexpectedly in May, driven by a rise in local doctor appointments and growth in other sectors although consumer-facing services fell slightly as inflation mounted, according to official figures.

The Japanese yen was a touch lower versus the U.S. dollar at 127.075, having taken a beating in recent months due to the Bank of Japan’s ultra-easy monetary policy making it an outlier among major global central banks.

The Australian dollar – seen as a liquid proxy for risk appetite – was up 0.2% at $0.67700.

The New Zealand dollar was up 0.1% at $0.6134, having taken little support from a 50 bps interest rate hike by the country’s central bank.

(Reporting by Elizabeth Howcroft; additional reporting by Sujata Rao; Editing by Catherine Evans)