The dollar held steady against the other major currencies on the back of safe-haven flows, while the euro hovered near a two-decade low as Europe grapples with energy supplies and broader concerns about economic growth. The euro currency pair touched the EUR/USD support level at 0.9900, its lowest level since late 2002 and settles around the 0.9945 level at the time of writing the analysis, waiting for anything new.

Russia will cut off natural gas supplies to Europe via the Nord Stream 1 pipeline for three days at the end of this month, in the latest reminder of the precarious state of the continent’s energy supplies. And the continent’s heatwaves have already put pressure on energy supplies and fears are growing that any disruption during the winter months could be devastating to business activity.

Commenting on that, Ray Attrill, forex analyst at National Australia Bank NAB, said: “Given the current mood, there are clearly concerns about whether it will be three days or whether it will be three years.” And “will it really just be a three-day maintenance or is this just another example of gas supplies to Europe being weaponized?”

In the same way, the performance of the dollar strengthened. The Japanese yen settled at 137.265 against the dollar after touching a one-month low of 137.705. Conversely, the Australian and New Zealand dollars were relatively flat, which NAB’s Etrile attributed to drawing market attention to the weak outlook for Europe.

Dollar Rises Due to Risk Aversion, Euro Hits the Parity Price

• At the forefront of investors’ minds were quick readings of manufacturing PMIs in the eurozone, UK and US, which will provide more clarity on the growth path for the respective economies.
• Investors are also awaiting the minutes of the European Central Bank’s latest policy meeting on Thursday which is likely to look hawkish even as the continent faces a slowdown in growth.

Another reason investors have turned to the dollar is the growing risk of a hawkish message from the Jackson Hole meeting at the Federal Reserve, which many officials pointed to last week.In this regard, analysts at ANZ said “bonds sold led by the front”. And “this is likely to be an expectation because the President’s (Jerome) Bowl speech on Friday is likely to repeat the hard-line messages.” Accordingly, yields on the standard 10-year Treasury bond rose by about 4 basis points for the week and reached 3.0165% last time. Two-year Treasury bond yields rose by about 5 basis points at 3.3102% as investors kept an eye on inflation and the Fed’s watchdog situation.

Expectations of the Euro Against the Dollar

The control of the bears on the direction of the euro currency pair against the US dollar EUR/USD is still the strongest and despite the movement of the technical indicators towards sell saturation levels, but the continuation of the weak factors of the currency pair portends a stronger downward movement, the closest support levels for the euro dollar are currently 0.9875 and 0.9790 respectively. I expect the downward pressure on the euro against the other currencies to continue until the cutoff and the return of Russian gas to Europe again.

On the upside, there will not be a first break for the last move according to the performance on today’s chart without moving the currency pair above the 1.0200 resistance. The currency pair will react today with the announcement of the readings of US durable goods orders along with pending home sales. Not to mention how willing investors are to risk or not.

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Japan’s determination to maintain the stimulus policy and ignore the path of the rest of the global central banks in tightening and raising interest rates contributed to a new collapse of the Japanese yen in the forex market. Since the start of trading this week, the price of the currency pair, the US dollar against the Japanese yen, recorded sharp bullish breaches. Its impact is towards the resistance level is 133.00, which is the highest in 20 years.

Japanese Prime Minister Fumio Kishida is likely to want the Bank of Japan to stick to its current policy direction even after a conservative change, according to a senior member of the ruling party. In this regard, Shoji Nishida, head of a pro-spending group in the party with ties to former Prime Minister Shinzo Abe, cited the fiscal policy plan published last week as evidence that Kishida is more committed than previously thought to the BoJ’s inflation target. A draft policy released by the Finance Ministry emphasized a 2% inflation target, as the BoJ had pursued under Governor Haruhiko Kuroda. But this time it added the words “sustainably and consistently” in reference to how to achieve the target set by the Abe government in 2013.

“What that means is that the policy cooperation with the Bank of Japan that was created under Abenomics must continue,” Nishida added in an interview last week. “This means that the next BOJ Governor must stay on Kuroda’s path.” Nishida’s comments come amid strong interest in who will succeed Kuroda when he steps down next spring. Economists and investors want to know if Kishida will look to reposition the Bank of Japan away from the ultra-low interest rate stance that helped push the yen to its lowest levels in two decades as other global central banks raised interest rates to curb inflation.

The wording change also suggests that the Nishida group may be gaining traction as a voice within the LDP. Kishida’s new capitalist plans and his talk of increasing the defense budget indicate that the government may initiate more spending. To finance various projects, Japan will need more debt issuance, and it will benefit from keeping interest rates low.

The loose wording in the financial draft on the government’s budget balance indicates that spending can be increased even after an additional budget was approved last week. While the government has said it will continue to meet its current goal of pursuing fiscal soundness, it has removed direct reference to balancing the state’s books by the end of fiscal year 2025. Nishida added that dropping the calendar-based target is a clear sign of change. “Politics in Japan is now moving towards a more aggressive fiscal policy.”

According to the technical analysis of the pair: Undoubtedly, the gains of the USD/JPY currency pair moved the technical indicators towards overbought levels, but the continuation of its gains factors may make the currency pair maintain its rebound gains for a longer period. In general, as long as the dollar-yen pair is above the psychological resistance 130.00, the general trend of the currency pair will remain bullish, and the closest resistance levels for the current trend are 133.20 and 134.00, respectively. The currency pair may maintain its track until the release of US inflation figures by the end of the week.

To turn to the downside, the dollar-yen pair will have to settle below the 130.00 level as a first stage.

The EUR/USD pair will likely have a bearish breakout and drop to the 20-year low of 1.0280.

Bearish view

• Sell the EUR/USD and set a take-profit at 1.0280.
• Add a stop-loss at 1.0500.
• Timeline: 1-3 days.

Bullish view

• Set a buy-stop at 1.0440 and a take-profit at 1.0515.
• Add a stop-loss at 1.0345.

The EUR/USD made a major bearish breakout last week as investors focused on the weakening of the European economy and the overall bullish US dollar. The pair slumped to a low of 1.0350, which was the lowest level since 2017. A slight decline below this level will push the pair to the lowest level since 2002.

European economy under strain

The European economy has been under serious strain in the past few months because of the situation in Ukraine. The situation worsened last week after Ukraine decided to shut a pipeline that transports natural gas from Russia to Europe.

It then came under pressure after Russia decided to sanction a number of European natural gas companies that receive gas from the country. As a result, the bloc’s gas prices surged and put important industries at risk.

At the same time, the bloc is struggling from an increased shortage of wheat and other industrial metals like steel and aluminum. Therefore, analysts expect that the bloc’s inflation will keep rising in the coming months.

This week, Eurostat will publish a number of important economic numbers that will have an impact on the EUR/USD pair. On Wednesday, the agency will release the latest consumer inflation data. Analysts expect these numbers to reveal that the bloc’s consumer price index rose to 7.5% in April. If they are correct, it will be the highest since records started.

The other key numbers will come on Tuesday, when the agency will release the preliminary GDP and employment change numbers. Economists believe that the economy expanded by 5.0% in the quarter. Christine Lagarde will also deliver a speech, a week after she signaled that that the bank will hike interest rates.

The other key data that will have an impact on the EUR/USD pair will be the American retail sales numbers that will come on Tuesday.

EUR/USD forecast

The EUR/USD pair made a strong bearish breakout last week. At the time, the pair managed to move below the important support at 1.0505, which was the lower side of the horizontal channel. It remains below the 25-day and 50-day moving averages.

Now, it has formed a bearish flag pattern while the Relative Strength Index (RSI) has moved above the oversold level. Therefore, the pair will likely have a bearish breakout and drop to the 20-year low of 1.0280.