Euro Forecast: EURUSD below 99c and EURGBP expects fresh UK PM – DailyFX | Jewelry Dukan

Euro, EUR/USD, EUR/GBP and Gas news and analysis

  • Germany announces third aid package to cut energy bills and third quarter starts off hard after July trade balance data fell
  • Russia is turning off gas taps to react against G7 oil price cap
  • EUR/USD is trading below 99c while EUR/GBP stands at a possible bend ahead of the announcement of the new UK Prime Minister

The federal government announced its third aid package to cushion rising energy costs. The list includes one-off tax breaks for retirees and students, expanding housing benefits to 2 million recipients, cutting Social Security contributions, and reducing VAT in restaurants and bars, among others. Critics of the package argue that the €65 billion package represents just 2% of GDP compared to fiscal support during the pandemic, which was around 15% of GDP. Other concerns include the lack of price caps on electricity and gas consumption and broader support for businesses.

Unfortunately for the euro, the bad news continues. The euro-zone’s big industrial economy showed the third quarter got off to a challenging start as Germany’s trade surplus for July fell to €5.4 billion from a previously revised €6.2 billion in June. Somewhat predictably, imports and exports with Russia fell more than 17% and 15% respectively month-on-month. Retail was a typical growth driver in Germany – a situation that no longer seems to be the case.

German trade balance (to July 2020) continues its downward trend to start Q3

Source: TradingView, prepared by Richard Snow

Oil price cap and indefinite delay until Nord Stream resumes

There have been many developments since Friday as the G7 confirmed a price cap on Russian oil, which seems to have prompted a reaction from Russia. Not long after the price cap was announced, Gazprom identified an oil leak as the reason oil flows had not resumed. Siemens Energy issued a statement saying the oil leak was not a technical reason for the suspension of operations, but the flow will continue to be halted until the issue is resolved. European gas prices edged higher as expected, with the October futures contract up about 25%.

EUR/USD, EUR/GBP Both at decision points but for different reasons

EUR USD

EUR/USD broke below 99 cents this morning while the US dollar continues to climb above 110. Although the pair has retreated somewhat around midday in London and is trading above 0.9900. EUR/USD remains subdued, although markets expect a 70 basis point hike on Thursday, suggesting a 75 basis point preference over 50 basis points.

Technically, a break below 0.9900 with Momentum would be of concern for EU policymakers as there is little to stop a sustained decline towards 0.9700. The pair is likely to react to the Fed’s continued hawkish stance and deteriorating power and gas pressures across Europe. There is also a risk of a peripheral bond flare-up, however the ECB is confident it has the clout to deal with policy transmission constraints via existing programs and the newly launched Transmission Protection Instrument (TPI). Nonetheless, bond market volatility is likely to increase.

EUR/USD daily chart

Source: TradingView, prepared by Richard Snow

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EUR/GBP

EUR/GBP has an interesting proposition this week as the UK is set to announce the new leader of the ruling Conservative Party who will eventually take over as Prime Minister from Boris Johnson. Liz Truss is the chance for the favorite to be announced and promises to unveil a support package within a week, according to a BBC interview over the weekend – something that could give the pound a much-needed boost.

Technically a cluster of uppers wicks to the resistance zone 0.8660-0.8680 suggests a possible pullback. Support appears at 0.8595 ahead of 2/38 Fibonacci retracement (0.8523) came into focus. Bullish continuation remains possible if the pair breaks through 0.8680.

EUR/GBP daily chart

Source: TradingView, prepared by Richard Snow

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The weekly EURGBP chart helps define the main resistance zone and subsequent support.

EUR/GBP weekly chart

Source: TradingView, prepared by Richard Snow

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX

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