11.07.202217:10 Forex Analysis & Reviews: Euro retaliate for sanctions

The growth of the euro in response to strong statistics on the US labor market in June, as expected, turned out to be a short-term reaction. It was associated with the implementation of the principle "buy the US dollar on rumors, sell on facts." However, you can't get away from the truth: the eurozone is too weak for the EURUSD bulls to be able to organize a counterattack and correction. And a new round of gas wars proved this.

Russia has reduced the supply of blue fuel to Italy by a third and blocked the Nord Stream for a 10-day maintenance. Germany will suffer the main damage from this, and Berlin is very much afraid that a decade will not be enough. The taps will be closed for a long time, so it will be necessary to switch to gas rationing and subsidies to large enterprises to keep them afloat. Moscow has a great opportunity to avenge Western sanctions, why not use it?

If blue fuel stops coming, the German economy will definitely face a recession, and not at the turn of 2022–2023, as Bloomberg experts predict, but in the coming months. The situation is aggravated by Russia shutting off taps for Kazakh oil in the amount of about 1.5 million bpd, which will raise prices and push the entire global economy into recession. For the eurozone, the situation is overshadowed by the depreciation of the euro towards parity with the US dollar, which makes energy even more expensive.

With a recession about to knock on the door of the currency bloc's economy, the ECB must act very carefully so as not to further worsen the situation. The Bloomberg consensus estimate suggests that Christine Lagarde and her colleagues will raise the deposit rate by 75 bps in 2022 and to 1.25% by March 2023.

Estimated dynamics of the ECB deposit rate

If we recall that the FOMC forecasts suggest an increase in the federal funds rate to 3.8% by this period, it becomes clear that the EURUSD bulls simply have no chance. Parity is about to become a new reality, and it may be followed by a move to 0.985 and even to 0.95.

The news that China is reintroducing lockdowns adds fuel to the fire of euro sales. Nomura estimates that 373 million people were under restrictions in mid-April, causing a significant economic slowdown. Economists polled by Bloomberg believe that in the second quarter, the pace of its expansion fell to 1.2% YoY, which is the worst dynamics since the beginning of the pandemic. This circumstance, coupled with the expected recession in the eurozone and a slowdown in US GDP to 1%, as New York Fed President John Williams expects, is pushing the global economy into recession, worsening risk appetite and contributing to the sale of the euro against the US dollar.

Technically, there is a steady downward trend on the EURUSD 4-hour chart. A rebound from dynamic resistance in the form of a moving average near 1.015 or a successful assault on support at 1.007 should be used to build up short positions with targets at 1 and 0.99.