The world’s most-popularly traded currency pair has plummeted past its pandemic low and below the psychologically-important 1.060 level to trade around levels not seen since March 2017.
EURUSD appears to be on a path towards testing various crucial historical support levels, going by the price action from March 2015 through April 2017.
Why is the euro falling?
The shared currency has been dragged lower today by news that Russia halted gas flows to European countries such as Poland and Bulgaria.
With sorely-needed energy supplies now becoming scarcer on the continent, European households and businesses may not be able to afford these skyrocketing commodity prices – a prospect that also threatens to severely weaken the economy.
Already, the bloc currency had been dragged lower in recent months due to the Russia-Ukraine war, an European Central Bank that’s lagging its global peers in the rush to tighten policies, and growing concerns over global growth stemming from China’s ongoing lockdowns (note that China is a major trading partner with Europe).
These concerns have prompted the German government today into slashing its 2022 GDP forecast from 3.6% down to 2.2%.
Adding to the euro’s woes is the strengthening US dollar. The buck’s strength is due to rising market expectations that the US Federal Reserve will have to raise interest rates more than initially expected, in its own quest to calm red-hot inflation in the world’s largest economy.
Where to next for EURUSD?
If the bearish sentiment continues, EURUSD may even test parity (EURUSD = 1.0), an event not witnessed since December 2002.
But first, euro bears must drag the bloc currency below several critical support levels, including the January 2017 low of 1.03395.
Parity between the euro and the US dollar may become likelier if the ECB is still perceived to be dovish relative to the increasingly aggressive Fed in the weeks and months ahead.
A further escalation in the Ukraine conflict that further ramps up commodity prices and greatly darkens the Eurozone’s economic outlook would, in turn, heap more downward pressure on the euro.
Could the euro recover?
A technical rebound could be on the cards in the near term, if the EURUSD seeks to recover from oversold conditions, with its 14-day relative strength index having gone below the 30 line.
However, such a rebound may prove fleeting if the fundamental outlook doesn’t change.
From a fundamental perspective, a sustained recovery for the euro however would require either a strong hawkish signal out of the ECB, that it’s ready to join its global peers and tighten policy, or a meaningful dilution of geopolitical risks, with the latter looking highly unlikely in the near future.