FX.co ★ EUR/USD. Pitfalls of the downward trend

Today is a landmark day for traders of the EUR/USD pair: for the first time in almost 20 years, the dollar equaled the euro, reaching the parity level. However, this event has rather a symbolic meaning: after the breakthrough of the 5-year price low (1.0340), the decline to the 1.0000 mark was only a matter of time. Many experts are now concerned about the future prospects of this pair. There is no consensus on the market regarding the fate of the downward trend. According to some analysts, EUR/USD will consolidate below parity and will trade in the range of 0.9800-1.0000 in the medium term. According to other currency strategists, the pair will land around the 95th figure. According to third experts, the price will circle around the parity zone with a run of 50-100 points, reflecting the indecisive position of both bears and bulls of the pair.

The current price behavior after reaching the 1.0001 mark speaks in favor of the latest version. The price bounced up 70 points from this target, not daring to overcome the key support level. Traders' fears are well-founded: no one wants to "catch the price bottom" by opening short positions on the expiration of the downward trend. Therefore, as soon as the price approached the odious price outpost, market participants began to close short positions en masse, thereby extinguishing the downward momentum. In such conditions, it is difficult to assess and predict the prospects of EUR/USD, relying only on technical analysis, which draws rosy prospects for bears in the form of conquering the 99th figure. While fundamental signals suggest that it may be difficult for the dollar to keep its positions below the parity level, and even more so to go 500 points lower, to the 0.9500 mark.

Obviously, the EUR/USD pair is declining not only due to the strengthening of the dollar, but also amid the weakening of the euro, which is actively losing its position due to the growing problems of the European economy. The single currency is flying down for three reasons: rising gas prices, rising inflation and energy shortages. The energy crisis, in my opinion, is a key problem, and, according to experts, it will only worsen in the foreseeable future. Thus, according to experts of the International Energy Agency, the global shortage of energy resources, which led to a shortage and an increase in prices for electricity and fuel, has not yet fully manifested itself. "We have not seen the worst yet," the IEA summed up, also stating the obvious fact that the energy crisis leads to an increase in the cost of living around the world.

Pay attention to Monday's EUR/USD correction shot as the pair hit 1.0184. The momentum was fuelled by the news that Canada agreed to make an exception to the sanctions against Russia and send to Germany a turbine that has undergone maintenance, necessary for the Nord Stream-1 gas pipeline. Reacting to this news, the euro crept up, allowing the bulls to organize a correction. However, investors' optimism dried up in the afternoon. It turned out that Nord Stream-1 will reach full capacity only if Canada agrees to cooperate in the future – the turbines for the gas pipeline were produced in this country, so they can only be repaired there. Given the geopolitical realities and the sanctions regime against the Russian Federation, many doubt that systematic work in this direction will continue. Some analysts have suggested that in case of a negative response from Ottawa, the work of the Nord Stream-1 gas pipeline could be stopped just in time for the start of the heating season in Europe.

In the face of this news, the EUR/USD pair turned 180 degrees and rolled down again, reaching the parity level on Tuesday. Here it is necessary to note two nuances. Firstly, attention is drawn to the fact that the pair reacted very sharply to the optimistic news from Canada. Secondly, Ottawa has not yet said "no" to the issue of further maintenance of turbines, so if agreements are reached (and such a scenario is quite likely, given the strong lobby from Germany), the euro may strengthen its position. At least here it is necessary to recognize that this fundamental factor hypothetically carries risks for EUR/USD bears.

If we talk about the prospects for the development of the downward trend below the 1.0000 level, we should also recall the Federal Reserve, which is currently the dollar's ally. Fed officials are increasingly in favor of a 75-point rate hike at the July meeting, but are in no hurry to announce similar steps at subsequent meetings. According to Fed Chairman Jerome Powell, the pace of monetary policy tightening will depend on the dynamics of inflationary growth. In this context, a special role is played by the US consumer price index, the June figures will be released on Wednesday. If this report disappoints, traders are unlikely to decide to conquer the 99th figure, at least in the near future. The first signs of a slowdown in the CPI will be viewed through the prism of a slowdown in the core PCE index, which shows a downward trend on an annualized basis for the third consecutive month.

Thus, given such "time-lapse mines", it is not worth considering downward targets located below the parity level now. EUR/USD bulls are unable to reverse the trend, but are able to organize a corrective counteroffensive, especially in the area of the key support level of 1.0000. Therefore, it is advisable to consider short positions only on corrective pullbacks, with targets of 1.0050 and 1.0010.