The month of July has been an unmitigated disaster for the euro – with only three trading sessions in the books, EUR/USD has declined a staggering 2.73%. Earlier in the day, the euro dropped to 1.0186, its lowest level since December 2002. The euro appears headed for parity with the US dollar, a psychologically significant level.
The economic outlook in the eurozone is not an encouraging one. Inflation surged to 8.1% in May, surpassing the April record of 7.4%. A peak in inflation remains elusive, and the ECB is way behind the inflation curve – the central bank hasn’t raised interest rates yet, which are in negative territory. Even so, a lukewarm eurozone economy means that raising rates poses the risk of a recession. The energy situation has been deteriorating, as sanctions against Russia have led to counter moves in which Moscow has reduced its gas exports to Europe, which could result in an energy shortage this winter. If Russia reduces oil or gas exports to Europe, prices will soar and this could cause a severe economic downturn.
A strike by Norwegian oil and gas workers on Tuesday threatened to exacerbate the situation. The Norwegian government has stepped in and ended the strike, but investors remain nervous as the eurozone’s energy situation could become precarious.
Today’s data out of the eurozone showed some improvement but did little to raise risk sentiment. Germany’s Factory Orders rose 0.1% in May, up from -1.6% in April but still a negligible gain. It was a similar story for eurozone retail sales, which came in at 0.2% in May after a -1.4% read in April. On Thursday, Germany releases Industrial Production for May, which is expected to slow to 0.7%, down from 0.4%.
EUR/USD Technical
- EUR/USD faces resistance at 1.0124. Below, there is support at 1.0075
- There is resistance at 1.0221 and 1.0324
