- It was a strong bearish trading week for the performance of the EUR/USD currency pair.
- The bears succeeded in moving prices towards the support level at 1.0612, the lowest for the currency pair in five weeks, and closed the week's trading stable around the level of 1.0693, as it is still moving within a descending channel.
- The US dollar’s purchase power is increasing, following the growing expectations about the future of tightening the US Central Bank's policy, amid positive results confirming that the US economy has not reached stagnation, but rather is strong, even with the times of continuous US interest hikes from the US Federal Reserve.
The euro has been under pressure against the dollar recently, however, lower gas prices and supportive capital flows will pick up over the coming months, according to Deutsche Bank. In this regard, the German bank says in a new currency research briefing: “The basic flow dynamics have become significantly more positive for the euro this year.”
Developments in the natural gas market are seen as particularly supportive of the euro, thanks to the continued decline in prices.For his part, George Saravelos, a strategic analyst at Deutsche Bank in London, stated that “Prices have continued to reach new lows in recent days, which will reduce the energy bill in Europe.”
Wholesale natural gas prices in Europe fell to a 17-month low on Friday to €49.80/MWh amid rising wind electricity production, relatively warm temperatures, and steady imports. However, declines were not registered in the EUR/USD exchange rate which continues to extend the recent pullback from highs just above 1.10.
And at the time of writing, EUR/USD spot is priced at 1.0630 as a broader return to the greenback - associated with a recent set of stronger-than-expected US data - is running through global currency markets. But the analyst says dips in EUR/USD should be bought as the energy crisis fades in 2022.
Deutsche Bank estimates that, on current trends, gas storage could be refilled by summer. After that, Europe will not need to buy more gas until winter. All in all, we estimate that Europe's import bill could fall by more than half this year, which would imply the sale of 100 billion to 150 billion euros of natural gas alone.
But Robin Brooks, chief economist at IIF and former chief forex strategist at Goldman Sachs, says the euro should fall further as the eurozone remains in the grip of an energy crisis. The analyst stated, “The euro has resumed its descent to the parity level. This fixes one of the biggest cases of mispricing in global markets. The euro should not have risen the way it did. Markets have mispriced a mild winter and absence of energy shortages as a sign that Europe's energy shock is over. The shock continues.”
However, the return of investor capital to the eurozone is most likely due to the EUR/USD outlook, according to analysts at Deutsche Bank. Researchers have found that the era of negative interest rates at the ECB prompted investors to embark on a massive program of divestment of domestic yield in favor of foreign assets over the past decade. Most of the capital was sent to the United States. The Deutsche Bank analyst added, “With European yields now rising, these outflows have stalled. And compared to just the past few months, we see a net shift of €800 billion in portfolio flows in favor of the euro.”
Deutsche Bank expects a structural widening of interest rate differentials in favor of Europe this year, which in turn will benefit the euro's exchange rates. The bank's analysts added, “The flow dynamics have become significantly more positive for the euro this year. This remains one of the structural pillars of our bullish view on EUR/USD.”
EUR/USD Forecast:
According to the performance on the daily timeframe chart below, the EUR/USD currency pair is still moving within a bearish channel that was formed recently since it abandoned the psychological resistance level at 1.1000. Strength factors of the US dollar are increasing, the bears have the strength to move towards stronger support levels and the ones closest to 1.0600 and 1.0520, respectively.
From the last level, you can think of buying the pair without risk, as the technical indicators will then reach strong oversold levels. On the other hand, over the same period of time, there will be no first reversal in the direction of the euro/dollar without moving toward the resistance levels of 1.0775 and 1.0890, respectively. Today, there is an American holiday that will affect the market performance and liquidity, and therefore we expect a calm movement for the currency pair today.
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