The euro was missing some couple of pips to parity with the US dollar, after which the bulls rushed into a counterattack. Back in February, the EURUSD pair was trading at 1.15, the collapse was rapid, and many investors considered the 1 to 1 level as a reason to lock in profits, so why not start a rebound? At least technically. From a fundamental point of view, the downward trend remains in force.
Another nail in the coffin of the regional currency was the drop in investor confidence in the German economy to the lowest level since 2011. According to Bloomberg forecasts, indicators of expectations and current conditions from the ZEW Institute are rapidly diving into the abyss amid fears of a 55% probability of a recession in the German economy.
Dynamics of investor confidence in the German economy
Weak statistics caused German bond yields to fall and widened the rate differential with their US counterparts. As a result, the EURUSD pair almost touched parity. Will profit-taking on shorts be able to stop the collapse? Perhaps for some time, after which the market, having got rid of the ballast, will go down again. After all, the prevailing logic in Forex is this: the Fed still has more room to raise rates in the future, especially given the strong US labor market. The ECB is simply forced to act cautiously, given the dependence of the eurozone economy on the energy crisis.
And this is not the only barrier for Christine Lagarde and her colleagues. An increase in the deposit rate will lead to an increase in yields and widening spreads in the European debt market, which the ECB cannot allow. As a result, the central bank will most likely use the "stop and go" strategy, which in the 1970s failed to prevent the US from avoiding a recession and provoked a rise in unemployment above 10%.
Not surprisingly, amid different rates of monetary restrictions in the US and Europe, hedge funds added $769 million to their net short positions in the euro this week by July 8. As a result, the figure reached $2.2 billion, the highest level since November.
Despite the rebound of EURUSD from the parity area amid profit taking, Deutsche Bank and Citigroup forecast the pair to fall to 0.95. It is quite possible that most of the negative from the shutdown of the Nord Stream has already been taken into account in the euro quotes, but what if the US stock indices resume their downward trend? Morgan Stanley believes that disappointing corporate reporting will contribute to this. A 16% strength in the US dollar over the past year would hurt earnings-per-share by 8%. The data will be disappointing, the S&P 500 will fall, global risk appetite will decline, and the US dollar will rise as a safe-haven currency.
Technically, there is a steady downward trend on the EURUSD 4-hour chart. In such conditions, the rebound from dynamic resistance in the form of moving averages and pivot points at 1.007, 1.012, and 1.0155 should be used to form shorts.
