Euro stays close to a crash. Forecast as of 20.07.2022

The EURUSD drop resulted from a combination of the ECB’s slowness, the energy crisis, and the political crisis. If the ECB acts more decisively and Russia resumes gas supplies, the situation will change. How? Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

News rules financial markets. After a source familiar with the matter informed Bloomberg that the ECB could immediately raise the deposit rate by half a point, and Reuters received information from trusted people about the resumption of Nord Stream from July 21, EURUSD bulls went ahead. The major currency pair hit a two-week high despite being close to a crash a bit earlier.

The anticipation of death is worse than death itself. The European Union was tired of waiting for the complete shutdown of Russian gas and accepted this scenario as a base one. According to the forecasts of the European Commission, a severe winter will deduct 1.5 percentage points from the EU GDP, a moderate one – 0.6-1 percentage point. If all the planned measures can be implemented, the losses may even be reduced to 0.4 percentage points. It means maximizing the import of liquefied natural gas, restoring coal capacity, and other measures. According to Wood Mackenzie, if the winter turns out to be colder than average in recent years, Europe will have to ration only 7% of the gas demand.

If Russia resumes gas supplies on July 21, the recession in the euro area will be averted, as well as a downturn in the US GDP growth. Despite the signals of the yield curve, whose inversion has correctly predicted all 6 recessions in the economy since 1980, the current situation is different. James Bullard shares this opinion. The St. Louis Fed President claims that the yield curve inversion now indicates that investors are confident that the Fed will curb inflation. If prices were at 2%, one could suggest an impending recession.

The euro area, the USA, and China may avoid the worst outcome, saving the global economy from a crash. If so, global risk appetite should grow, which has already begun. US stocks indexes performed the best daily rise in at least a month amid positive corporate reporting, supporting the EURUSD rally.

Bloomberg insider information encouraged the EURUSD bulls. Yes, after the June meeting, Christine Lagarde virtually ruled out the possibility of a 50-basis-point increase in the deposit rate in July. However, in one of her subsequent speeches, she has said that there are conditions under which a gradual approach is inappropriate. In particular, it means higher inflation threatening to de-anchor inflation expectations, which is happening in the euro area.

Weekly EURUSD trading plan

If Russia resumes gas supplies and the ECB hows determination, the EURUSD correction could continue up to 1.04 or 1.05. However, the euro is still pressed down by political problems in Italy. If Mario Draghi fails to save the situation, the euro should face a new round of sell-offs. Hold on euro longs entered at $1.007 and $1.012 but be prepared to exit trades.

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