The Euro tumbles to a lowest point since 2002 to reach parity against the US Dollar as market risk aversion provides tailwind for the safe haven currency. The US Dollar Index (DXY) which serves as a gauge of the greenback’s strength against a basket of rival currencies, propelled to a fresh 20-year high to hover around 108.4. Some of the main themes driving the EURUSD slump are the hawkish expectations on the Fed and sour sentiment on the global economy.
Upbeat jobs data fuels hawkish expectation
After three increasingly aggressive interest rate hikes by the Fed in 2022, markets were concerned about a looming recession, as the rapidly heightening cost of borrowing would stifle economic growth. The fear of a “hard-landing” has some market participants speculating that the Fed would lift its foot off the accelerator in terms of monetary policy tightening to allow the economy to breathe. However, US jobs data released last Friday painted a strong labour market, which reflects that the US economy is still growing.
In June, the nonfarm payrolls released by the US Bureau of Labour Statistics showed that 372,000 new jobs were created in the US, higher than the market consensus of 268,000 jobs increase. The upbeat data implies that the Fed may press on with its hawkish policy stance to fight inflation given that the economy is still faring well. Healthy jobs data and hawkish expectation on the Fed were among factors that contributed to the US Dollar strength.
Fear of Russian gas cut-off
Another major factor weighing on the Euro sentiment is the fear that Russia would permanently cut off gas supplies to EU. On Monday, the biggest single pipeline carrying Russian gas to Germany, the Nord Stream 1, was cut temporarily on Monday for annual maintenance. Although the gas supply is expected to resume on 21 July, speculations that Russia would permanently shut off gas exports in retaliation for sanctions stirred fear of exponential gas prices increase that may lead to economic slowdown and recession in the EU.
Technical Analysis
The technical set up for the EURUSD is looking very bearish with no signs of a bullish reversal. Looking at the monthly chart, the pair is trending lower in a large falling wedge that stretches back to 2005. At the time of analysis on 12 July, the pair is testing the psychological support level at 1.00. We hold a view that the bearish move could extend further to test the next support level around 0.96 (S1) in the medium term. S1 also coincides with the lower band of the falling wedge which may provide some support for the pair. In the alternate scenario where EURUSD stages a correction to the upside, R1 at 1.0235 would cap gains.
Key events to watch this week:
Tuesday, July 12
EUR – EU ZEW Survey –Economic Sentiment(Jul), Germany ZEW Survey – Current Situation(Jul), Germany ZEW Survey – Economic Sentiment(Jul)
Wednesday, July 13
EUR – Germany Harmonized Index of Consumer Prices (YoY)(Jun), EU Industrial Production s.a. (MoM)(May)
USD – Consumer Price Index (MoM)(YoY)(Jun), Consumer Price Index Core s.a(Jun), Consumer Price Index ex Food & Energy (MoM)(Jun), Consumer Price Index ex Food & Energy (YoY)(Jun)
Thursday, July 14
USD – Fed’s Beige Book, Monthly Budget Statement(Jun), Initial Jobless Claims(Jul 8), Initial Jobless Claims 4-week average(Jul 8), Producer Price Index ex Food & Energy (YoY)(Jun), Fed’s Waller speech
EUR – European Commission releases Economic Growth Forecasts
Friday, July 15
USD – Retail Sales (MoM)(Jun), Retail Sales Control Group(Jun), Retail Sales ex Autos (MoM)(Jun), Fed Index of Common Inflation Expectations(Q1), Michigan Consumer Sentiment Index(Jul)
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