FX.co ★ EUR exhausts its fears

Strike while the iron is hot. This principle of trade has been known for centuries. The more terrible stories pop up, the more arguments investors find to prove that the situation will soon improve. Stories about Russia cutting off gas, a harsh winter, European households going into energy poverty, and the euro bloc's economy going into recession look like a kind of horror film. Thescenario is clearly written by EUR bears, but you need to understand that any fear has a limit. The biggest drop in gas prices in the Old World since March inspired euro buyers to counterattack.

Dynamis of gas prices in Europe

The cost of natural gas in Europe has been growing for six weeks in a row, which forced theEURUSD bulls to retreat. If the abnormal growth of consumer inflation is triggered by energy prices, how can an ECB rate hike help the euro? Monetary tightening is not able to reverse inflation, but it can set the stage for a recession in the EU economy. It's another matter if gas prices decrease based on information that German storage facilities could be filled by 85% already in September, although according to the plan it should be October. Here it is time to think about monetary policy.

Yes, Jerome Powell in Jackson Hole came up with hawkish remarks. He talked about the fact thatthe Fed's cycle of rate hikes is not over yet, that more rate hikes would follow, and then interest rates would remain at elevated levels for a long time. However, such a scenario was well known before the speech of the Fed's Chairman. Thus, it's time to cut long positions on the US dollar according to the principle of "buy the rumor, sell the fact." Those who did not do this at the end of the week by August 26 have the opportunity to do it now.

Moreover, the ECB knows how to surprise market participants. In July, it caught investors off guard by raising the deposit rate by 50 basis points. Why not take a step further in September? Due to the hawkish rhetoric of the members of the Governing Council, the derivatives market prices in the probability of an increase in borrowing costs by 75 basis points. If so, then the pace of the ECB monetary tightening increases and the European regulator is catching up with its American counterpart in terms of the levels of key interest rates. Why not buy EURUSD?

Outlook for rate hikes by US Fed and ECB in September

Thus, the faster pace of the ECB's monetary tightening, Europe's ability to get through the winter with less pain than gas buyers expect, and the fact that most of the positives are already priced in the US dollar quotes could enable a serious correction in the most traded currency pair. The essential condition is that gas prices in the Old World should decline on a regular basis.

Technically, EUR/USD might develop a reversal pattern on the 4-hour chart, namely the Rising Wedge. For this to happen, the currency pair should grow above 1.009 which will entail the formation of the last point 5. Aggressive traders may enter the market with long positions at the resistance area of 0.9985 – 0.999 where there is a pivot point and the lower border of the fair value.