EUR/USD Still Vulnerable, but Natural Gas Pullback Could Offer Near-Term Respite


EUR/USD OUTLOOK:

  • After suffering heavy losses in recent months, the euro appears to be stabilizing against the U.S. dollar
  • In the last couple of days, EUR/USD has managed to reclaime parity and is tentatively moving towards a key resistance
  • The euro’s fundamentals remain weak, but its recent bounce could pick up pace if European natural gas prices continue to correct lower

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The EUR/USD has plummeted in 2022, sinking more than 12% since January to lows not seen in decades. Since the end of the first quarter, the downtrend has worsened due to the fallout from the war in Ukraine, which has created a major energy crisis in Europe, sending regional natural gas prices to record highs earlier this month and increasing the likelihood of a painful recession.

Although risks to the outlook are tilted to the downside for the 27-country bloc, it appears that the euro has begun to stabilize against the U.S. dollar around the parity mark in recent days, as European natural gas prices have come off record levels, with the Dutch benchmark futures down more than 20% from their August peak.

DUTCH NATURAL GAS FUTURES (INVERSE) VS EURUSD

Source: TradingView

The corrective move in this fossil fuel market has been driven by news that stockpiles in Germany and other countries are being replenished faster than planned, a situation that lessens the need for winter rationing measures to counter potential shortages. Rationing is an extreme step that could severely undermine industrial production and thus economic activity.

With natural gas storages being filled ahead of schedule, despite reduced Russian flows, and reports that Brussels will intervene to dampen sky-high power costs, economic prospects appear less dire for now. In this context, there may be a small window of opportunity for the common currency to stage a near-term bounce following its relentless depreciation this year.

Another catalyst that could briefly fuel the euro’s rebound is the growing possibility that the ECB will become more aggressive at upcoming council meetings in response to the latest upside inflation surprise. By way of context, Eurozone headline CPI jumped 9.1% y-o-y in August, the highest on record, a sign that price pressures are broadening and becoming more extreme.

In light of current developments, the central bank led by Christine Lagarde could find the courage to raise interest rates by 75 basis points in September, in line with market pricing as of today. On a longer-term horizon, however, the ECB will not likely rival the Fed’s hawkish monetary policy stance, so EUR/USD may not have a significant upside heading into 2023, barring unexpected economic outperformance of the Eurozone.

EUR/USD TECHNICAL ANALYSIS

After bouncing off the 0.9900 zone earlier last week, EUR/USD managed to reclaim the parity level in the last couple of days, moving tentatively towards a key ceiling near 1.0090. Traders should carefully watch this technical area because a topside breakout could attract new buyers, reinforcing the euro’s rebound and paving the way for a move towards trendline resistance and the 50-day simple moving average, just a touch above the 1.0200 handle.

On the flip side, if sellers resurface and spark a bearish reversal, initial support comes in at 0.9900. If the bears are successful in breaching this floor decisively, selling impetus could accelerate, creating the right conditions for a slump towards channel support around the 0.9670.

EUR/USD TECHNICAL CHART

EURUSD technical chart

EUR/USD Chart Prepared Using TradingView

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—Written by Diego Colman, Market Strategist for DailyFX





Image and article originally from www.dailyfx.com. Read the original article here.