The EURUSD bulls are set back, as well as the ECB. The energy crisis and problems in Italy limit the central bank’s capacities. Let us discuss the Forex outlook and make up a trading plan.
Weekly euro fundamental forecast
There is no way out. Due to the energy crisis, the euro-area economy is likely to face a recession. If the ECB raises rates, it will only deepen the recession. If rates are not raised, record-high inflation of 8.6% could be the beginning of the end. Consumer prices may not stop at 11%. The further growth will exacerbate the already severe cost of living crisis. The ECB can do little, and the EURUSD upward movement is limited.
Information about Gazprom’s letters, which allege that due to force majeure, the Russian company is forced to limit gas supplies to Europe, discouraged the EURUSD bulls. On July 21, the 10-day maintenance period for Nord Stream ends, and the euro buyers hope that gas supplies to Europe will be resumed. However, the most likely scenario is either partial deliveries or a complete gas shutdown. The European Union’s plan to fill gas storage facilities by 80% by the beginning of November will not be realized.
According to ABN Amro, inventories account for only 25% of gas demand in the region, and the latter is snowballing against the backdrop of abnormally high temperatures and demand for air conditioners. Prices continue rising in Europe, which increases the risks of a recession and makes it possible to understand how the energy crisis brought the EURUSD to parity.
Energy prices are the main reason for the acceleration of European inflation. The ECB cannot fight them, but it just needs to do something to return CPI to the target. Otherwise, the euro risks falling even lower, and the cost of raw materials will rise even higher. Moreover, there has come the era of reverse currency wars. According to the IMF, over the past year, 75 of the 100 monitored central banks have raised rates by an average of almost four times each by 3 percentage points in emerging markets and by 1.7 percentage points in advanced economies. The European regulator looks too dovish, and the Governing Council’s hawks compare the monetary tightening with medicine. What is the point of taking medication in September if one is sick now?
The ECB’s capacities are limited not only by the energy crisis and a soon economic recession but also in Italy, whose public debt is 150% of GDP. Furthermore, Mario Draghi could resign, which will trigger a new political crisis in Italy. Therefore, the European Central Bank could cut the rates, following the hike, as in 2011.
Weekly EURUSD trading plan
I suppose the EURUSD could rise a little on the expectations of positive news from the ECB. However, I expect sell-offs on 20-21 July. Be ready to exit the longs entered at 1.007 and 1.012 and enter sell trades.