EUR/USD Equality… What’s Next

The psychological obsession level was tagged today. The decisively breach one follow through is not seen yet, but it’s going to be a higher probability scenario.

It’s a one way move for EURUSD as 2022 is passing. Euro has depreciated by over 11% against dollar this year. The markets obsession with equality came true today, with the level of euro reaching to the level seen last in November 2002. Now, that equality has been reached and most of us are thinking, what next ? Initial short-term reaction is oversold as traders close positions and took profit.

For euro to form a bullish or bearish view going forward, it’s important to cut the factors driving EURUSD.

The US economy remains the most flexible relative to eurozone and other G10 universe. The increase in cost of living crisis and impact on household is more pronounced in UK and Europe. Global recession clouds rapidly forming, USD is therefore benefiting from safe haven flows. The main reason we see dollar growth is due to global growth of fears/risk aversion.

The main overarching factor which is driving EURUSD to equality is the parabolic rise in energy prices. Gas supplies from Russia are declining since June, now reduced 60% than usual to Germany. Germany imports 80% of its natural gas requirements. The final push to equality came from the fears over gas supplies being turned off as the nord stream 1 pipeline closes from July 10-21 to undergo maintenance.

The main concern is that Russia keeps the gas taps turned off post 21st July. France sees this as the most likely scenario. The market prices in around 50% chances of the gas flows not being turned back on. Under an adverse scenario, where the market fully prices this outcome, then 0.9 is the level which they see EURUSD tumbling to.
For Euro to become bullish, what needs to be seen is the fragmentation risks addressd properly, a hawkish ECB rate path, lower energy prices ,ceasefire in Ukraine and gas flows back online post 21st July and China injecting a fiscal booster shot into the veins of the Chinese economy.

A decisive move below equality see a wave of forced selling. The trapdoor lower could really open then. 0.95 seems to be the next major level on the downside. Todays US CPI number could be the catalyst for EURUSD to revisit equality.