EUR/USD Struggles as Markets Look To EU Energy Meet

EUR/USD, IMF, Russia, Energy Prices – Talking Points

• EUR/USD had slipped sharply back from a downtrend challenge
• Bulls are making some attempt to form a base above historic lows
• This week will probably decide whether or not they can

The Euro is clinging to modest signs of stabilization on Wednesday, from last week’s sharp selloff, but this respite comes amid obvious headwinds and looks extremely shaky. The fundamental backdrop remains grim as European Union energy ministers meet in Prague. They want to shield already-gloomy consumers from surging energy bills as the continent heads into an uncertain winter. Those consumers are already chafing under a cost-of-living crisis exacerbated sharply by the conflict in Ukraine. Russia’s President Vladimir Putin has effectively cut European access to crucial Russian gas through the Nord Stream pipelines thanks to European support for the beleaguered government in Kyiv. The continent’s leaders are casting about for ways to wean themselves off Russian supply. However, this will take a huge amount of time, even assuming it can be done, and involve plenty of economic pain at a time when there’s already enough to go around.

IMF Comes Down Hard on Eurozone Prospects

Sure enough, the International Monetary Fund said on Tuesday that the Eurozone will undergo the most serious economic slowdown of any global region next year, with growth only set to reach 0.5% according to its forecasts. The Washington DC-based IMF also predicts that both Germany and Italy will see recessions in 2023. Germany is of course the EU’s powerhouse economy. Where it goes, there goes Europe.

The Euro may be deriving a little overall support from the even greater turmoil currently afflicting Sterling as markets recoil from the incoming Conservative government’s economic plans. However, Eurozone yields have crept up with those of UK gilts on Wednesday, according to Reuters.

The single currency can, it appears, look forward to some support from further interest rate rises ahead from the European Central Bank, but the fragility of the Eurozone economy means such action will hardly be risk free, and the US Dollar remains likely to dominate as the currency most able to absorb such inflation-busting measures.

EUR/USD Technical Analysis

The fightback seen last week took EUR/USD tantalizingly close to the downtrend line which has been firmly in place on the daily chart since February of this year.

Chart Prepared by David Cottle Using TradingView

Previously you’d have to go back to early June to find an attempt at it. However, the sharp falls seen since have meant that this latest challenge has comprehensively failed, with the 20-year lows of late September, below 95 cents, coming back into play again. Much will depend on whether the pair can remain above the nascent uptrend line formed from those lows and now under test. That line comes in at 0.96880 on Wednesday, with a daily close below that line very likely to signal an early retest of those highly significant lows.

Sentiment towards EUR/USD remains biased to go long at these levels, according to IG data, but bullish impetus has clearly weakened and its not clear at least in the short term what might revive it. The next couple of days’ trading could provide key pointers.

–by David Cottle for DailyFX