EUR/USD Update: Recession Fears, As Reduced Russian Gas Grips Germany

EU Leaders Head To Brussels To Discuss Serious Gas Shortages

EU leaders have made their way to Brussels to continue discussions around solutions to the current gas supply issue that has dire consequences for Germany’s industrial sector this winter. Russia has supplied around 60% less gas than requested by Germany which has knock-on effects for other countries within the eurozone as alternative supply remains sparse.

German Economy Minister Robert Habeck warned that some industries may have to shut down in the winter if Russian supply remains at current levels. European countries typically use this time to store gas needed for the cold winters and shockingly low inventory levels will likely result in tough choices having to be made. Earlier this week the German Minister raised the “alarm stage” to a level where soon gas companies will be able to pass on higher energy costs directly to consumers. Prior euro gains on the back of the European Central Bank’s (ECB) suggested a 25 basis point hike in July, with a possible 50 bps hike in September likely to be capped by growth concerns for Europe’s largest economy.

An additional headache surfaces in the form of the Nord Stream 1 pipeline which is due to undergo planned maintenance between 11 and 21 July. A slow return to service threatens to tighten gas supplies even further.
 

EUR/USD Key Technical Levels

The euro’s brief rally stemmed from the talk of a lift-off in July with a potential 50 bps in September but it only took flight after the market had digested the unsubstantiated mention of the Bank’s “anti-fragmentation bond tool”, which sent the pair sharply lower. EUR/USD is still below the pre-ECB meeting level of 1.0716 and has faced challenges attempting to trade above the 2020 low at 1.0635.

Technically, we could still be in the process of confirming a double bottom pattern, a bullish reversal pattern, but this would become clearer upon a move above 1.0800 which is far from current levels. First, we would need to see the price hold above the 1.0635 level, then 1.0758 as these levels make up nearby resistance. In the event, that the threats to growth in the eurozone become more serious than initially anticipated, support would appear at the 1.0450 level followed by 1.0340 – a break of this level would lessen the credibility of the double bottom formation.
 

Daily EUR/USD Chart

(Click on image to enlarge)

EUR/USD Update: Recession Fears, as Reduced Russian Gas Grips Germany

Source: TradingView, prepared by Richard Snow
 

Major Risk Events In The Next 7 Days

A potential standout on the economic calendar is the ECB’s equivalent of the Jackson Hole Economic Symposium, which is to be held in Sintra Portugal. The three-day event is scheduled to take place between the 24th and 27th of June with ECB President Christine Lagarde taking part in a policy panel discussion on the final day. Markets will look out for any insights into the little-known “anti-fragmentation tool”.

The finalized figure for US GDP in Q1 is due next week – expected to confirm a contraction. On Thursday PCE inflation data is due for release with core PCE showing signs of moderating as prior prints eased. Another lower print is unlikely to sway the Fed as Jerome Powell mentioned that the nuanced declines in PCE data have a long way to go before the Fed can conclude that inflationary pressures are subsiding. On Friday we have the euro area (flash) inflation data for June with core expected to level out at 3.8% while headline inflation expected higher at 8.3%

EUR/USD Update: Recession Fears, as Reduced Russian Gas Grips Germany

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