EUR/USD News and Analysis
- German gas levy to fund alternative supply to begin in October
- Knee-Jerk ‘Fed Pivot’ proves to be short-lived – EUR/USD fully retraced
- Major risk events: ZEW econ sentiment, FOMC Minutes, US retail sales
German Gas Levy to Fund Alternative Supply to Begin in October
Trading Hub Europe is expected to announce the 2-3 cents per kilowatt hour (kWh) levy later today in an effort to fund alternative gas supply in the wake of inconsistent Russian supply. Germany’s cabinet agreed to the levy on the 4th of August, with the levy to run from October this year to April 2024.
Knee-Jerk ‘Fed Pivot’ Already a Distant Memory
After Wednesday’s cooler US CPI data, markets wasted no time in pre-empting a Fed slowdown in the current rate hiking cycle which allowed EUR/USD to recover some lost ground, trading around 1.0368 briefly. Since then, it appears as if common sense has prevailed with a full retracement of the knee-jerk reaction.
From a fundamental perspective, despite the cooler inflation print the Fed are still set to hike into year end, increasing the interest rate differential between the US and the EU even further. Previously, members of the FOMC and Jerome Powell himself, have said that they are looking for “compelling evidence” that inflation is slowing before considering changing course. One softer print is hardly ‘compelling’. Furthermore, the Fed tend to favor PCE over CPI as a preferred measure of inflation.
Germany’s gas flows continue to trickle in and the new levy to help fund alternative gas sources is due to add further challenges for the economy. To make matters worse, the Rhine river – a major waterway transporting fuel and industrial goods among other things, has been in the process of drying up and poses a threat to continued usage of the waterway as the hot, dry summer continues.
EUR/USD Key Technical Levels
The massive spike up on Wednesday after the cooler US CPI print had EUR/USD itching to move higher. However, a retest of 1.0368 didn’t quite materialize, setting the scene for what has now become a full retracement of the advance.
Price action now trades back within the prior range (1.0100 – 1.0280) and actually rests currently at the 1.0180 mark which is roughly the mid-point of the range. With a fair amount of high importance event risk this week, including the FOMC minutes, we may see another breach of the range which is likely to only be temporary in my view, if it happens at all. Nevertheless, the sentiment of selling rallies appears constructive once again.
EUR/USD 4-Hour Chart
Source: TradingView, prepared by Richard Snow
The daily chart shows just how far EUR/USD has dropped, meaning there would need to be a rather significant move higher to even begin to entertain the possibility of a continued move higher.
EUR/USD Daily Chart
Source: TradingView, prepared by Richard Snow
Major Risk Events for the Week Ahead
This week we see a return to EU and US focused evet risk starting with the ZEW economic sentiment print on Tuesday which is expected to reveal a pessimistic outlook for the euro zone at -53.8. Wednesday is a data heavy day where we could see a spate of increased volatility. We have the second estimate of EU GDP for Q2 followed by US retail sales and the FOMC minutes. Markets will be eager to see how unified the FOMC was in their decision to put an end to forward guidance and instead rely on incoming data to inform the magnitude of future hikes. On Thursday we have the final EU inflation print for July – which is unlikely to result in a large move in the market unless we see a massive deviation from prior estimates.
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— Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX
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