EURUSD has been falling hard and while we are oversold in the short term we would expect a move down to as low as 0.900. The fundamentals are bearish and there going to get worse for the EUR. Our view of the fundamentals, sentiment, and technicals below.
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The zone faces recession already as we have noted in previous articles but it could get a lot worse of Russia cuts off energy flows
Energy Flow from Russia to Stop?
“Germany is bracing itself for a potentially permanent halt to the flow of Russian gas from Monday when maintenance work begins on the Nord Stream 1 pipeline that brings the fuel to Europe’s largest economy via the Baltic Sea.” (GUARDIAN NEWS)
The work on the pipeline is an annual event and requires the gas taps to be closed for 10 to 14 days but will Russia reopen it? Robert Habeck, Germany’s economy minister, has not shied away from addressing the government’s concerns. On Saturday, he spoke of the “nightmare scenario” that could occur. It is and the zone already faces recession with the ECB unable to fight inflation with aggressive rate hikes…
Deutsche Global Head of FX Research George Saravelos noted that “safe-haven” moves towards the U.S. dollar could become “even more extreme” as the U.S. enters a technical recession, furthering the downward pressure on the EURUSD trade.
“We conclude that a move down to 0.95-0.97 in EUR/USD would match the all-time extremes seen in exchange rates and USD risk premium since the end of Bretton Woods.
“If both Europe and the U.S. find themselves slip-sliding into a (deeper) recession in Q3 while the Fed is still hiking rates, these levels could well be reached.” They will in our view but in the short term we would expect a bounce
Downside Target 0.9000
We think 0.9500 is conservative and expect a run on longer-term down to 0.900. Inflation is out of control and the ECB can’t raise rates aggressively like the Fed due to the weaker nations of the zone being unable to take higher borrowing costs. We agree with the view below
Sentiment
Despite the big fall in the euro large speculators don’t hold a big short position and our view is they will take any bounce to load up on short trades.
Technical Analysis
The bounce to correct oversold in our view could run to the levels shown below.
