Forex exchange rates usually move in cycles. Monetary tightening strengthens the currency, but the end of it presses the local money down. If other factors influence this process, there are structural changes. How do they affect EURUSD? Let us discuss the Forex outlook and make up a trading plan.
Quarterly euro fundamental forecast
Back to the past. The EURUSD fight for parity takes us back to the 2000s when the euro was called toilet money, and central banks used concerted intervention to keep faith in a project called the “eurozone.” This time there is no question of its viability. On the contrary, Croatia is ready to become the 20th member of the currency bloc. The euro’s drop has other reasons. Only by understanding the cause, we can understand how long the collapse will last and where the bottom may be.
Since the beginning of the year, the EURUSD has sunk by 12%, while the trade-weighted euro exchange rate has lost only 1.6%. This circumstance suggests that the main driver of the EURUSD downtrend is the Fed’s monetary policy. The Fed is determined to fight inflation and intends to raise the federal funds rate to 3.25-3.5% by the end of the year. At the same time, the risks of the euro-area fragmentation and the energy crisis limit the ECB’s capacities. The derivatives market expects the deposit rate to be near zero by the end of 2022.
Even though monetary policy is the main factor in Forex pricing, the EURUSD response to the gap between the Fed and the ECB interest rates proves that the reason for the euro drop in July is different.
Europen countries worry that the 10-day shutdown of Nord Stream for maintenance will last longer. Such a Doomsday scenario, according to UBS, will lead to a 15% drop in profits for European companies, a 20% drop in the EuroStoxx 600, and a EURUSD crash to 0.9.
The Eurozone imports 80% of gas. The share of natural gas in the energy balance is high for the largest countries: 40% for Italy, 26% for Germany, and 24% for Spain. Russia has reasons to retaliate, while gas revenues make up only a fifth of the budget. For comparison, oil accounts for half. Stopping the Nord Stream forever is easier than redirecting the oil flow from Europe to Asia.
According to the Bundesbank, such a scenario will reduce Germany’s GDP by 6% in 2023, which is fraught with a decline in the euro-area economy by 4%-5%. JP Morgan believes each percentage point lost in economic growth will cost EURUSD 3%. That is, mathematically, the pair risks losing another 12-15% of its value.
If US inflation continues to accelerate, the euro downtrend against the dollar will also strengthen. Investors are nervous ahead of the CPI reports for June. The release of the false report nearly sent them into total chaos. The information appeared on Twitter that consumer prices in the United States jumped to 10.2%. The Bureau of Labor Statistics was forced to refute it.
Quarterly EURUSD trading plan
I believe the weakness of the euro-area economy is structural rather than cyclic due to the energy crisis. Therefore, the EURUSD should continue falling to 0.985 and 0.95. I recommend selling.