The US sanctions will have a worse impact on the eurozone’s economy than the US’ as Europe is connected more closely with Russia. That increases the eurozone’s stagnation risks. How will it affect the EURUSD? Let’s check that and make a trading plan.
Weekly fundamental forecast for euro
“Buy when blood is running in the streets” — that’s an old trading principle that laid a foundation for the US stock indexes and the euro’s recovery after the EURUSD fell to 1.1106, its lowest since May 2020. The single European currency was supported by the S&P 500 but will that continue for long? The Ukraine crisis impacts the US stock market and the eurozone’s economy differently.
Geographically, the eurozone is more dependent on Moscow than the US. Russia accounts for about 40% of gas supplies and 30% of oil supplies in the EU. Unsurprisingly, gas prices soared 40% in Europe amid the military operations in Ukraine and are currently eight times higher than in the US. According to S&P Global Platts, European gas reserves are 25% now lower than the 5-year average value, so restrictions on Russian supplies will only increase prices further.
Natural Gas reserves in Europe
Source: Wall Street Journal.
So, it should be no surprise that European leaders opposed the idea of banning Russia from using SWIFT as this step will result in supply outages that will hit key products for the EU economy. Amid unprecedented sanctions Joe Biden imposed on Russia, the European banking sector might be severely affected.
Faster growth of energy resources prices in Europe strengthens the risk of a further inflation boost, inflation already being at a record 5.1%. Geopolitics raised one-year-ahead inflation expectations from 2.6% to 3.6% within two weeks. Theoretically, the ECB could be forced to normalize monetary policy, which is a bullish factor for the EURUSD.
Market expectations of inflation in Europe
Source: Wall Street Journal.
The Ukraine crisis pushed the eurozone’s economy to recession. Stagflation, which is a combination of high consumer prices and slow GDP growth, is looming there. So, not only will the ECB forget about rate hikes, but will also be unwilling to withdraw monetary stimuli. That’s confirmed with Robert Holzmann’s hawkish comments that the ECB was on the path of normalization but could suspend it now.
Potential growth of the S&P 500 could help out EURUSD bulls theoretically, but the war in Ukraine stabbed the global economy three times with higher inflation, lower GDP, and uncertainty. The more uncertainty lasts, the worse it is for stocks. The situation worsens as the Fed plans to tighten monetary policy. Christopher Wallen said he would vote for a 50 basis points rate hike in March if US macrodata remain “exceedingly hot.”
Weekly trading plan for EURUSD
I think the EURUSD might start consolidating at 1.117-1.126 in the short term. Think about growth selling until the pair breaks above 1.126.
Price chart of EURUSD in real time mode
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