Interest Rate Hike by ECB Is Imminent, but the Outlook for the Euro Remains Grim

Central Bank

Summary:

Energy supply shortages and fragmentation risks have exacerbated the risk of recession in the Eurozone. The outlook for the Euro (EUR) is worrying as the European Central Bank (ECB) could have very limited room to raise interest rates.

SELL EURUSD

Close Time

CLOSED

1.02650

Entry Price

0.99900

1.03300

1.17877 +0.00089 +0.08%

28.8

Pips

Profit

0.99900

1.02362

Exit Price

1.02650

Entry Price

1.03300

Fundamentals

The EUR rallied sharply before the ECB meeting amid profit-taking at highs and significant weakness in the US dollar index. However, the bearish factors in the EUR remain intact.

As the war between Russia and Ukraine continues, markets are concerned that Russia could disrupt gas supplies to Europe. The Nord Stream 1, the largest pipeline carrying Russian gas to Germany, is still at risk of being cut off after its annual maintenance to be ended on 21 July. According to a letter from Gazprom, the company has declared force majeure on gas supplies to Europe to at least one of its major customers, which will exacerbate fuel shortage concerns in Europe.

In addition to Europe's energy crisis, the ECB is also lagging relatively behind in combating inflation compared to other central banks. Markets are concerned that energy supply shortages and fragmentation risks are undermining the eurozone economy, and then the risk of recession has increased. Therefore, the room for the ECB to raise interest rates could be very limited. Meanwhile, rising political risks in Italy in recent days have also exerted downward pressure on the EUR.

In addition, due to the significant differences between Europe and the US in terms of economic and monetary policies, there is also the possibility of a further decline in the EUR. As a result, a number of institutions are forecasting a target price for the EURUSD well below its current level.

Technical Analysis

EURUSD: Interest Rate Hike by ECB Is Imminent, but the Outlook for the Euro Remains Grim _1

In the daily chart, the bearish trend of EURUSD is unchanged, and the decline is expanding. Last week, EURUSD once fell below its almost 20-year parity of 1.00. Despite the last three consecutive sessions of the rally, the outlook for the EUR is bleak, and further declines are still possible in the future.

EURUSD: Interest Rate Hike by ECB Is Imminent, but the Outlook for the Euro Remains Grim _2

In the 4H chart, there is strong support for EURUSD at the psychological mark of 1.00. In recent days, it has turned from a decline to a rise and once set a new high for the past two weeks, with a strong short-term momentum of rising. The indicator RSI is close to the overbought territory, but the overall bearish trend is still not reversed. Hence, EURUSD can still test the parity level again in the future or even break down to the downside.

It is recommended to go short at highs. You can go short with small positions when the price rallies to around 1.0270. The target is around 0.9990, with a stop-loss above 1.0300.

Trading Recommendations

Trading direction: Short

Entry price: 1.0265

Target price: 0.9990

Stop Loss: 1.0330

Support: 1.0000/1.0100

Resistance: 1.0200/1.0270

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