Euro went all in

A false start or an information leak? EUR/USD didn’t wait for the U.S. inflation report and shot up past the psychologically important 1.1 mark. The market is reasoning roughly as follows: yes, consumer prices in July will accelerate from 3% to 3.3% annually, but due to base effects. The core indicator will likely continue to decrease, so the Federal Reserve won’t raise rates in September. Everything will be fine. It’s time to buy risky assets and sell safe-haven currencies, primarily the U.S. dollar.

The bulls’ attack on EUR/USD is also facilitated by an 8% drop in European gas prices within a day after they had increased by 26% at the end of the previous trading session. Back then, investors were worried about strikes in Australia, which could potentially reduce LNG supply by 10%. The main shipments go to China, and if China doesn’t get this blue fuel, it will start looking elsewhere. Europe’s competition for suppliers will intensify, leading to rising prices.

However, gas storage in the Eurozone is 88% full, significantly above their historical averages. So investors have calmed down a bit. They are concerned about the risks of another energy crisis, which negatively impacted EUR/USD in 2022. The decreased likelihood of such a turn of events has emboldened the bulls to attack.

Dynamics of EUR/USD and gas prices

In general, the market follows the principle: if the exchange rate doesn’t go in one direction, it’s more likely to go in the opposite. Indeed, the euro remained stable against the U.S. dollar despite a series of factors negative for the regional currency unit. The currency block’s economy teeters on the brink of recession, whereas in the States, there’s increasing talk of a soft landing. The ECB is contemplating whether to raise the deposit rate to 4% or halt the monetary tightening cycle. Italy’s imposition of a 40% tax on excess bank profits heightens political risks. Lastly, the U.S. Treasury yield rally creates a favorable background for the strengthening of the U.S. dollar, as does the correction of stock indices.

Despite the bulls’ successes with EUR/USD, all these trump cards of their opponents remain in play. Therefore, just as the potential for the pair’s decline is limited due to the imminent end of the Fed’s monetary restriction cycle, the euro’s rally also has its limit. Most likely, a medium-term consolidation awaits us, within which it makes sense to use two-way trading: sell EUR/USD on the rise and buy on the decline. Meanwhile, weaker U.S. inflation data has pushed the pair higher.

Technically, on the daily chart, there’s an attempt by the bulls to storm resistance in the form of moving averages and the pivot level at 1.1035. If the buyers succeed, we can increase our long positions on EUR/USD formed from the 1.098 level. However, in the future, rebounds from 1.1065, 1.1105, and 1.1145 should be used to turn around and transition to shorts.

The material has been provided by InstaForex Company – www.instaforex.com