Euro outlook remains murky as gas prices soar and Fed hike looms

Euro backdrop

The euro remains vulnerable, particularly against a strengthening US dollar due largely to the war in Ukraine. The Russian supply of oil to Europe is severely compromised, and natural gas prices have responded by sky rocketing.

The benchmark Dutch Title Transfer Facility (TTF) natural gas futures contract has taken flight. The contract is 250% higher than the June low. More indicative of the developing crisis is that the price has gone from under 4 Euro per Mega Watt hour (MWh) in 2020, to over 292 MWh today.

The interest rate differential between the European Union and the US also creates headwinds for EUR/USD. The Federal Reserve Jackson Hole symposium, that starts on Thursday, might deliver further guidance on the path of future hikes from the Fed.

Meanwhile, the European Central Bank (ECB) are expected to lift rates at their September meeting to battle alarming inflation at a time when economic conditions are deteriorating. Eurozone CPI will be released next Wednesday.

EUR/USD technical analysis

On Tuesday, EUR/USD traded down to 0.9900, its lowest level since December 2002.

The move went below the lower band of the 21-day simple moving average (SMA) based Bollinger Band. At the close of trade yesterday, it closed back inside the band. This could be a near term signal that a reversal in the downtrend may unfold.

Overall, the descending trend channel remains in place. In May and June made lows of 1.0349 and 1.0359 respectively. Both times, the price bounced off the January 2017 low of 1.0340. These three levels were broken on the initial run down to 0.9952 in mid-July.

Those three levels that were broken became break point resistance levels. The run up in price tested these levels to make a high two-weeks ago at 1.0369. This has now set up a potential cluster resistance zone at 1.0340 – 1.0370.

Since we have moved below that July low this week, the 1.618% Fibonacci extension at 0.9696 might provide support. That level currently coincides with the lower bound of the descending trend channel.

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