Inflation in the US has soared to a new multi-year high
The EUR/USD pair fell for the third week in a row, reaching a new 20-year low at 0.9951, and then modestly rebounded to the 1.0030 zone. The global economic situation continues to deteriorate, and speculative interest is rushing to a safe haven, which ultimately benefits the US dollar.
The EU is heading into the abyss
Fear of a recession in the US has dominated the headlines in recent months. However, Europe is slowly shifting into the spotlight, as the situation in the Union is even more alarming than in the United States.
The war in Ukraine is causing global food and energy shortages, with the EU suffering the most from the latter, as it depends on Russia for oil and gas supplies. On Monday, July 11, the Russian energy giant Gazprom closed the Nord Stream1 gas pipeline for maintenance, interrupting gas supplies to Germany. In the middle of the week, the company announced that it could not guarantee the resumption of operation of the gas pipeline. German Economy Minister Robert Habeck said that the uncertainty surrounding gas supplies "significantly overshadows the economic prospects for the second half of the year."
Italian Prime Minister Mario Draghi announced his resignation after his coalition partner, the Five Star Party, withdrew its support in a confidence vote, adding more problems on the euro side. The coalition fell apart when five-star leader Giuseppe Conte accused Draghi of not doing enough to deal with the economic crisis. Italian President Sergio Mattarella rejected the proposal to resign the former head of the ECB and still the prime minister of Italy and urged him not to resign.
Supply chain problems, combined with the rapid recovery of the economy after the initial closures associated with the pandemic, have led to inflation reaching levels not seen in several decades around the world. Politicians and central bank officials were shocked, and the latter switched to tight monetary policy at a rather uneven pace in the major economies.
Central banks under scrutiny
The US Federal Reserve tops the list of aggressiveness. The central bank raised rates to a floating range of 1.50% -1.75%. The European Central Bank, by contrast, is lagging behind as it plans to raise rates by 25 basis points for the first time in years at its meeting next Thursday. The imbalance between central banks partly explains the weakness of EUR/USD, as well as the fact that the crisis in the Union is getting worse.
On Wednesday, the dollar received an additional boost from risk aversion after the publication of the June CPI consumer price index, which rose to 9.1% year-on-year-more than expected. The news was even more discouraging amid hopes that the fall in oil prices in June would lead to a reduction in CPI.
The inflation figures supported speculation that the Fed could raise rates by 100 basis points, although such speculation was tempered by comments from Christopher Waller, a member of the FOMC, who noted that markets could be pre-estimating a rise of 100 basis points in July, adding that a rise of 75 basis points would all be at a neutral point.
Focus on ECB and business growth
In general, the macroeconomic data confirmed the gloomy scenario. A German ZEW survey showed that economic sentiment in the country and in the EU fell in July. In addition, German inflation was confirmed at 7.6% year-on-year in June, although US retail sales rose by 1% in June, which increased optimism and put short-term pressure on the US dollar.
Next week, the final estimate of the June EU consumer price index will be announced, which is expected to be confirmed at 8.6%. On Thursday, the European Central Bank will announce its decision on monetary policy. European monetary policy makers widely expected the first 25 basis point rate hike for this particular meeting, already discounted by market participants. President Christine Lagarde's speech after the announcement will be crucial, as speculative interest will study it for any clues about what's ahead.
Finally, on Friday, S&P Global will publish preliminary estimates of its July PMIs for the EU and the US. Business activity is expected to contract again at the beginning of the third quarter and is unlikely to remain at the level of expansion.
EUR/USD Technical Forecast
The EUR/USD pair has cut half of its weekly profit, showing some modest bearish exhaustion signals on the weekly chart, which are not enough to confirm possible ground. However, technical indicators have lost their bearish momentum, although the RSI maintains a modest downward slope around 26. At the same time, SMA 20 is moving down almost vertically, currently in the 1.0650 zone and well below the longest averages.
The daily chart shows that technical indicators have turned up slightly, remaining around oversold, hinting at a possible bullish corrective breakout. However, the pair is still moving well below the bearish moving averages, which reflect the strength of sellers.
The level to pay attention to is 1.0120, since profits outside of it can provoke further growth to the 1.0200 zone, and then to the 1.0340 zone. On the other hand, immediate support is at 1.0020, followed by a multi-year low set this week at 0.9951. If it breaks below this last level, the pair may approach 0.9800 before it finds buyers.
EUR/USD Sentiment Overview
The FXStreet currency forecast survey suggests that the pair is close to intermediate ground. Sellers are still in control of the weekly forecast, as bearish accounts for 67% of the experts surveyed, and the pair looks on average at 1.0087. However, there is a sharp change in sentiment in the monthly and quarterly forecasts, as bulls gain the upper hand, while those betting on a decline decline sharply. Then the pair returns to the 1.0400 area on average.
The overall summary chart shows that those expecting a recovery may be willing to sell at higher levels. The three moving averages studied maintain their bearish slopes. EUR/USD is barely visible above 1.0200 next week, but the number of potential targets expands in the monthly forecast to 1.000/1.0800. Finally, in the quarterly forecast, most of the goals are between 1,0200 and 1,600, which hints at constant pressure on the overall monda.