Euro cuts its own throat. Forecast as of 31.05.2022

By agreeing to ban Russian oil imports, the EU has made the task of the ECB to curb inflation extremely difficult. Rising prices for oil and other energy sources increase the risks of further acceleration of the European CPI. How will this affect EURUSD? Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

The ECB was clearly late to the monetary tightening party, and when it finally got there, the EURUSD bulls responded with a two-week rally. The euro could perform the best gain for the year in May. However, I’m afraid the rally could end soon. Investors again discuss the topics of divergence in monetary policy and stagflation in the euro area, which not long ago pushed the USD to a 20-year high.

Of course, the acceleration of Spanish and German inflation to 8.5% and 8.7%, respectively, supported the EURUSD growth as investors considered the statement of the Dutch central bank governor Klaas Knot that the ECB could hike the deposit rate by half a point in July provided the inflation continues rising. Yes, the inflation rate is going higher, but the problem is that much of this growth is driven by energy prices, which the ECB has no control over.

Dynamics of Germany’s inflation

Source: Bloomberg.

To follow the path of the Fed by aggressively raising rates to suppress domestic demand and bring it to the level of supply is a suicide. In this scenario, a recession in the euro-area economy is guaranteed. Furthermore, the EU officials have finally agreed on a sixth package of sanctions against Russia, including an oil embargo. The European Union will ban the import of black stuff from Russia, excluding oil imports from Russian pipelines. It is about 2/3 of supplies, and Brussels intends to bring the figure to 90% by the end of the year. Brent jumped above $120 a barrel, which is extremely bad news for all net oil importers. And the euro area is no exception.

The USA, on the contrary, is a net oil exporter, and the rise in oil prices will affect the US economy less than the euro-area one. Especially since the US inflation, unlike the euro-area one, is slowing down. Markets expected the Fed to make a pause in monetary tightening, setting back the EURUSD bears. Nonetheless, Jerome Powell and his fellow central bankers are not going to pause. Federal Reserve Governor Christopher Waller says he sees interest rate increases by 50 basis points continuing through the rest of the year until inflation approaches its 2% target. Currently, the US inflation rate is 6%.

Dynamics of US inflation


Source: Bloomberg

Waller, in general, agrees with the market expectations to see benchmark borrowing rates up to 2.65% by the end of 2022, but he is ready to raise it higher if necessary. Such hawkish speeches amid the oil market rally and a surge in the euro-area inflation send the Treasury yield up.

Weekly EURUSD trading plan

As Treasury yields are rising along with a slowdown in economic growth and weaker corporate reporting, the US indexes could start falling. Markets could return to the environment featured a fortnight before, when the greenback was an undisputed leader in Forex. Therefore, it could be relevant to sell the EURUSD if the price breaks out the support at 1.0735.

Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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