The euro seemed to be about to lock in a decent performance last week, buoyed by expectations of a hawkish ECB and a labour market report in the US that signalled to the Fed that pressures there may be easing.
However, the announcement by Gazprom that it was cutting off gas supplies to Western Europe indefinitely late-Friday sent the euro, and indeed most currencies, tumbling against the dollar. This news brings the prospect of widespread shortages of energy in Europe closer to reality and has increased market jitters surrounding the possibility of a global recession.
An energy supply shock, while unemployment remains low and inflationary pressures are at record levels, poses an unusually difficult challenge for the ECB at its meeting on Thursday. Traders will be looking at a finally balanced decision between hiking interest rates by 50 or 75 basis points, as the Governing Council tries to make up for lost time. The gas shock last week adds even more uncertainty to the decision.