LONDON — The euro was hovering just above parity with the United States dollar on Wednesday (July 13) while traders focused on US data due later in the session that is expected to show inflation at a 40-year high.

The euro was down 0.2 per cent on the day at 1.00375 to the dollar at 0804 Greenwich Mean Time.

On Tuesday, it had dropped as low as US$1.00005 on the most widely used Electronic Broking Services' dealing platform.

Market-watchers were focused on US Consumer Price Index data due later in the session. Economists forecast headline US inflation accelerated to 8.8 per cent 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 per cent monthly increase and cool slightly to 5.7 per cent 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 US central bank not to become more aggressive in its future rate hikes.

The euro is down nearly 12 per cent 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.

"Rising inflation, stalling economic growth and more recently fears that Russia could cut gas supplies have pulled the euro lower," said Ms Fiona Cincotta at City Index on Tuesday.

"The nail in the coffin today was dire data showing that economic confidence in Germany fell to a decade low," she added.

Russian energy giant Gazprom on Monday began 10 days of maintenance on its Nord Stream 1 pipeline — with Germany and other

European countries watching anxiously to see if the gas comes back on.

"The gas crisis has really spooked markets over the eurozone economy," Markets.com analyst Neil Wilson told AFP.

With relations between Russia and the West at their lowest in years because of the invasion of Ukraine, Gazprom may not reopen the valves, according to analysts.

"The next few weeks could be challenging for Europe, with possibly maximum uncertainty stretching into August," said SPI Asset Management's Stephen Innes.

"Investors increasingly believe that gas may not start to flow through Nord Stream 1 again following the scheduled maintenance on July 11-21, with further 'temporary' interruptions seen as likely."

Worries about a Covid flare-up in China — fuelling fears of more lockdowns — added to the downbeat mood.

A forecast-beating US jobs report last week suggested the world's top economy was coping with higher Federal Reserve rates, but it also gave the central bank more room to continue tightening — leading to concerns it could go too far and cause a contraction.

The European single currency is also under pressure from the Federal Reserve hiking US interest rates more aggressively than the European Central Bank.

The dollar has jumped 14 per cent against the euro since the start of the year.

US inflation data due out Wednesday could also solidify the case for the Fed to continue raising interest rates aggressively.

"In anticipation of that, investors have retreated to the safety of the US dollar once more, steering clear of risky assets in favour of haven" assets, said market analyst Craig Erlam at trading platform OANDA. AGENCIES