While in the second or third quarters of the year the eurozone economy expanded faster than the American one, in the fourth quarter everything may turn upside down. The record-high gas prices are to blame. Let’s discuss this and make up a trading plan for EURUSD.
Monthly Euro fundamental forecast
There is a version that God created economists so that meteorologists did not look too bad. Anyway, economic forecasts have recently become very dependent on the weather. The colder the winter in the Northern Hemisphere, the higher gas prices will rise, and the faster stagflation will come to the regions, the energy sectors of which are tied to this type of fuel. For example, the eurozone. The combination of high inflation and too slow GDP growth scares away investors from the euro like garlic scares vampires, suggesting that the fast start of the Fed’s monetary policy normalization and high demand for safe-haven assets are not the only drivers of the EURUSD downtrend.
While the US Congress is drowning in the problems of the national debt ceiling, an energy crisis is sweeping across Europe. In order to figure out what is really going on there, you need to go back 10 years. Then, frightened by the tragedy in Fukushima, the government of Angela Merkel decided to get rid of nuclear energy and switch to wind and gas energy instead. According to the plan, the transformation was to be completed by 2022. Indeed, over the past decade, the structure of energy consumption has changed significantly.
Changes in the structure of energy consumption in Germany
Source: Nordea Markets.
Berlin is now significantly more dependent on gas than in 2012, and the rise in prices for this raw material to record highs can cause no less serious damage to the eurozone economy than Britain’s Brexit or the shutdown of the US government. One should expect both a further acceleration of European inflation in the near future and a slowdown in GDP growth in the eurozone. According to Nordea Markets, the energy crisis will deduct about 1.5-2 percentage points from the GDP in 2022, as a result of which the eurozone economy will be significantly outperformed by the American economy. Isn’t it an argument to enter shorts on EURUSD?
Dynamics of GDP in the Eurozone and the USA, energy prices taken into account
Source: Nordea Markets.
The negative impact of record-high gas prices on GDP will manifest itself both through net exports since Europe is a net buyer of this raw material and through reducing the consumption of other assets because of higher electricity prices.
Just like Britain is at risk of stagflation due to Brexit, supply chain disruptions, employment problems, the eurozone is also ready to plunge into it. Meanwhile, the States are reaping the benefits of an improved epidemiological situation: a decrease in the number of people infected with COVID-19 has led to an acceleration in the growth of employment in the private sector from +349 thousand to +568 thousand in September, according to ADP. If the same happens with non-farm payrolls, investors will have the right to expect not only the beginning of cessation of $120 billion QE in November but also an acceleration of US GDP in the fourth quarter.
EURUSD trading plan for the month
Thus, along with the divergence in the monetary policy of the Fed and the ECB, EURUSD quotes go south due to the potential divergence in the economic growth of the States and the eurozone. Selling the pair at pullbacks justifies itself, why not keep going with this strategy? The new targets for shorts are 1.145 and 1.133.
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 LiteForex. 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.
Source: https://www.liteforex.com/blog/analysts-opinions/euro-is-in-crisis-forecast-as-of-07102021/
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