The euro is pressed down by the Italian political crisis and dependence on Russian gas supplies. The ECB rate hike by half a point will hardly save the single European currency. Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly euro fundamental forecast
Hardly had the euro bulls started to go ahead when the situation worsened again. Mario Draghi’s willingness to stay in power, Russia’s intention to reopen the Nord Stream, and the expectations of the ECB rate hike by 50 basis points sent the EURUSD up above 1.028. However, Draghi has a hollow victory in a confidence vote, Russia is willing to manipulate the gas exports, and the chance for the ECB’s big move in July is fifty-fifty. The euro has naturally fallen.
What Mario Draghi could afford in Europe doesn’t work in Italy. Being the ECB president, Super Mario ignored the voices of the German lobby and made decisions alone. His authority was indisputable, and the words that the central bank would do everything necessary to save the euro went down to history. The situation is different in Rome. Arrogance and inability to compromise will cost the Italian prime minister his post. Three of the prime minister’s key coalition allies, the 5-Star Movement, Forza Italia, and Salvini’s League, skipped the vote. Italy faces a snap parliamentary election, adding problems to the ECB.
A 25-basis-point increase in the deposit rate would widen the yield spread between Italian and German bonds. Since debt serves as a benchmark for credit valuation, this will lead to a tighter monetary policy in the south of the euro area than in the north. Without the anti-fragmentation program, this would set off deflationary processes in Italy and inflationary processes in Germany. Such differences force the ECB to be more flexible than the Fed and prove that it can raise rates for some borrowers and keep them the same for others. A complicated task that limits the potential for monetary tightening, leaving the euro vulnerable.
The derivatives market is setting expectations for a 170-basis-point increase in borrowing costs by the end of 2022, which implies their growth at each of the remaining meetings of the Governing Board this year. Moreover, the rate should increase by 50 basis points at several meetings. The European Central Bank has good reason to start with a big step.
Against the background of the energy crisis and the associated increase in imports, the euro area’s trade surplus is turning into a deficit. The current account should be a natural support for the euro viability. This support is weakening, and the regional currency has touched parity with the US dollar. The ECB may have no choice but to drive the rates up from the sub-zero area.
Weekly EURUSD trading plan
Unless the EURUSD breaks out the resistances at 1.025 and 1.03, the bulls will prove their weakness, and it will be relevant to sell. Investors may start selling off the euro on the fact of a deposit rate hike by 50 basis points, following the purchases on the news.