When disaster approaches but does not come, any positive news is received with relief. EURUSD had plenty of factors to take off, and the pair has been up. What’s next? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly euro fundamental forecast
As soon as the crisis becomes manageable, the demand for the US dollar as the main safe-haven currency falls. The fiscal stimulus withdrawal in the UK, a drop in gas prices in Europe to the lowest levels since June, when Russia first reduced the gas flow via Nord Stream to Germany, as well as a stronger than expected reporting of US banks, allowed the EURUSD to mark the best daily rise over the past two weeks. When the crisis looks less scary, risky assets go ahead.
New UK Treasury Chief Jeremy Hunt said he was reversing nearly all the government’s proposed tax cuts of £45 billion and would pare back an energy price-cap subsidy as he moves to reassure markets about the stability of the nation’s finances. Investors have been reassured, supporting the pound and other European currencies, including the euro. For how long will the support last? There is a risk premium in the price of British assets that wits call idiotic. Higher bond yields and less fiscal stimulus are likely to exacerbate the approaching recession, so sterling’s gains are temporary.
Against the backdrop of EU discussions on options for setting a price ceiling for gas futures and forecasts of warm weather in Europe, the gas price has dropped significantly. The energy crisis no longer seems to be something catastrophic, it was mostly priced in the EURUSD, so, the improvement in the global situation supports the euro. However, we should understand prices are still several times higher than last year, the German economy is pressed down, and other euro-area economies will also face a downturn. According to Bloomberg experts, German GDP will contract by 0.5% in 2023, contributing to a 0.1% decline in euro-area GDP.
Forecasts for European GDPs
Source: Bloomberg.
I don’t think the EURUSD bears are scared by the increase in the likelihood of a recession in the US over the next 12 months from 65% to 100%, according to Bloomberg’s model. The approaching recession in the largest economies of the world only fuels the demand for the US dollar, which has always served as a safe haven.
As for the growth of US stock indices, it was due to lowered expectations for corporate profits. Banks showed smaller losses than expected, and when the market looks oversold, a small driver is enough for it to rise. After all, the reporting season in the United States has just begun, and it may not be as positive as it was at the start. A drop in the S&P 500 will press down the EURUSD.
Weekly EURUSD trading plan
To sum up, the EURUSD rally results from the stabilization of the UK financial markets, a drop in gas prices, and a good start of the US reporting season. Each of these drivers doesn’t seem fundamentally strong, so the euro upward correction is limited. I suggest selling the EURUSD on the rise to 0.989, 0.992 and 0.9955.
Price chart of EURUSD in real time mode
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