- The price of the EUR/USD currency pair is still moving in its downward path, and an attempt to rebound upwards last week succeeded only by testing the resistance at 1.1065.
- It quickly returned under the control of the bears, and closed the week's trading stable around the support level at 1.0945.
- Despite the US inflation figures, the demand for the US dollar increased as a safe haven, and in light of the US Federal Reserve's progress in the list of hard-line banks.
Freezing winter weather seemed a distant concern as Europe stumbled, but investors and analysts got a reminder last week of the continent's fragile energy security and bond market risks. Spot natural gas prices have jumped nearly 30% in a single day after strike threats in Australia rattled investors.
ING Groep NV, Rabobank, and Saxo Bank A/S, therefore, recommend a hawkish ECB pivot as energy prices rise again, saying officials will look to prevent long-term inflation expectations from drifting higher. The next big market focus is the European Central Bank's inflation expectations survey due on Monday. But energy prices are troubling a range of markets including the UK, which lacks natural gas storage. The Eurozone will release inflation data next Wednesday.
While Europe's cold-weather supplies are plentiful, the region still pays four times as much as the United States and about twice as much as it did before the pandemic. As energy prices rose, the market's measure of long-term inflation expectations tested the highest level since 2010 last week, which investors say will make it harder for the European Central Bank to justify ending the tightening cycle.
Analysts from ING warned that the ECB's tightening could escalate to contain risks to price growth. And they cautioned against getting into steep trades — bets that longer-dated bond yields will rise faster than shorter notes. He said markets should not underestimate the ECB's "determination and determination".
In general, Europe's dependence on LNG imports has been driven by turbocharging due to the Russian invasion of Ukraine. Weaning itself off Russian energy supplies fueled the inflationary wave that began last year and risks fueling price pressure in the future as the region remains highly vulnerable to any turmoil in global energy markets. Money markets are currently pricing in a 40% chance of a 25bps hike from the ECB in September, with pricing in a further 66bps of cuts for next year. At the same time, Rabobank echoed the possibility that the ECB will need to show "more resolve" to deal with inflation given the risk of more bullish energy shocks.
Saxo Bank blamed traders for the increase in energy prices in their positions due to the steady rise in market-based measures of inflation. Rather than raise interest rates further, analysts expect the ECB to remain on hold for much longer. They favor the policy of the yield curve-sensitive short end, and expect the yield curve to flatten through October. For State Street & Trust Co, the jump in rates is unlikely to drastically alter the ECB's policy outlook, as moves have not been as dramatic as those seen last year and inflationary pressures continue to ease elsewhere.
EUR/USD Technical Outlook
As I mentioned before, the general trend of the EUR/USD currency pair will remain bearish as long as it is stable below the psychological level of 1.1000. The closest targets for the bears are currently 1.0900 and 1.0820, respectively, and the last level is sufficient to push the technical indicators towards strong oversold levels, and one can think of buying the currency pair without taking risks.
On the other hand, according to the performance on the daily chart below, breaking the resistance at 1.1120 will support the bulls to control the performance of the EUR/USD currency pair again. I expect a very quiet trading session for the euro-dollar pair today, in light of an empty economic calendar today. Until the announcement of the important events, the content of the minutes of the last meeting of the US Federal Reserve Bank.
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