The situation with the euro/dollar pair is still uncertain. The euro's rally stems from three factors: expectations of resumed gas supplies via the Nord Stream 1 pipeline, a 50 bp interest rate hike by the ECB, and hopes that Draghi will stay on as prime minister of Italy. The former head of the European Central Bank made it clear that he would stay in power if parliamentarians backed his coalition government. Meanwhile, Russia said it would resume gas supplies to Europe if a turbine for the Nord Stream 1 pipeline currently being serviced in Canada was returned. Otherwise, the Nord Stream 1 capacity will be reduced by 20%.
European debt markets have reacted positively to the news that Mario Draghi is likely to stay on as Italy's prime minister. As a result, Italian bond yields headed lower. The spread between Italian bond yields and German peers narrowed by 25 basis points.
Differentials between yields on Italy and Germany's government bonds
ario Dragi's resignation could have forced the ECB to tackle such a tough task as spreads closing. At the same time, the focus would have been on political speculation rather than on the difference in the economic development of individual countries in the euro area. This would have complicated the process of raising the deposit rate by 50 basis points at the next meeting scheduled for July 21. Thus, expectations of the European Central Bank's decisive steps have pushed the EUR/USD pair above 1.025. However, Bloomberg now believes the European Central Bank's Governing Council will lack hawks for bold measures. Against this background, it comes as no surprise that the euro has begun to pull back.
Thus, the situation is uncertain. The first reaction of the 5-Star Movement and far-right League to Mario Draghi's speech before Parliament was nagative. There is no guarantee that his coalition will be preserved, and early elections will not take place. Besides, the European Commission has proposed a plan to reduce gas consumption by 15% over the next eight months. Of course, this will help European countries reduce their reliance on Russian gas, but this step may harm the region's economy. Gas prices first fell on Russian President Vladimir Putin's comments but then rose as investors were trying to mull over what he said after all.
Europe's dependence on Russian gas
Finally, no one knows what decision on interest rates the ECB will make. Bloomberg experts predict that the regulator will raise the key rate by 50 basis points. However, their comments that there may not be enough hawks for such a decisive step, sow confusion among investors. Against this background, many of them prefer to close long positions, which results in a pullback in the EUR/USD pair.
From a technical point of view, the 4-hour chart shows that the euro/dollar pair is forming a Double Top pattern. Bulls cannot push the price above the 1-1.023 range. All this indicates their weakness. If EUR/USD fails to consolidate above the pivot point of 1.0195, it will be possible to open short positions. Alternatively, a return above 1.025 will create a buy signal.