EUR/USD Week Ahead Forecast: Corrective Rebound Possible

• EUR/USD could pare loss on Shanghai headlines
• Upside likely limited as energy supply risks persist
• Russian gas payment deadlines a possible pitfall  

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The Euro to Dollar rate slipped to a five year low last week but could attempt a corrective rebound in the days ahead if global markets find reasons for cheer in signs that China's most stringent 'lockdown' thus far may be nearing its end. 

Europe’s single currency extended an almost 18-month long downtrend with a fall to its lowest since 2017 last week but could potentially attempt to pare losses over the coming days following the revelation that Shanghai is set to begin a phased reopening from China’s most severe ‘lockdown’ so far.

“The impact of Shanghai’s lockdown is far-reaching. Economic and technological linkage with the rest of the world is at risk,” says Raymond Yeung, chief economist for Greater China at ANZ. 

The shutdown of Shanghai has been one significant source of global market risk aversion in recent weeks because the city is home to China’s largest seaport, which is also the world’s most important for its significance in international supply chains of goods manufacturing companies.

Above: Euro to Dollar rate shown at daily intervals alongside Renminbi-Dollar rate. Click image for closer inspection.

“Oil remains over $100 despite much of China in lockdown, which Shanghai may lift slightly from 16 May,” says Michael Every, a global strategist at Rabobank. “Imagine how high oil would be with China open.”

Any early tailwinds for the Euro-Dollar rate are likely to be tempered, however, by ongoing market concerns about the security of Europe’s energy supplies from Russia after Ukraine’s national gas pipeline operator halted some flows through its pipelines to Europe last week.

That stoppage was followed by the Kremlin’s decision to ban sales of gas and other transactions with a handful of important European firms while both events together prompted fresh speculation about the risk of the Euro falling toward parity with the Dollar in the weeks or months ahead.

“Our economists estimate that a total loss of Russian supplies, combined with rationing of the remainder, could dent euro area GDP by more than 5pp over one year,” says Marek Raczko, an FX strategist at Barclays. 

Last week’s disruptions came ahead of payment deadlines for major European buyers of Russian gas that are widely reported to be falling due this week and which could potentially see other countries joining Poland, Bulgaria and Lithuania in the ranks of those who’ve had their deliveries suspended.

Above: Euro to Dollar rate shown at daily intervals with Fibonacci retracements of February and April falls indicating possible areas of technical resistance to any recovery by the Euro. Click image for closer inspection.

“If Russia closes its gas taps, we expect EURUSD to fall below parity,” Barclays’ Raczko and colleagues said in a Friday research note. 

While the mood in global markets and developments relating to energy supplies coming from Russia are important for the single currency both it and the Dollar are also likely to be sensitive to the implications of remarks made by European Central Bank (ECB) and Federal Reserve (Fed) policymakers.

On this front ECB President Christine Lagarde is set to address a Soroptimist International charity event at 18:00 London time on Tuesday just one hour before Fed Chairman Jerome Powell speaks about inflation at an event hosted by The Wall Street Journal.

“EUR has blatantly struggled to draw any tangible benefits from the increasingly hawkish tone among ECB policymakers, which in our view boils down to the already quite aggressive tightening expectations (80-85 bp fully priced in by year-end),” says Francesco Pesole, a strategist at ING.

“Now, the next major support to watch is the 1.0340 January 2017 low. A break below such a level would make the risk of EUR/USD hitting parity quite material,” Pesole and colleagues said in a Friday research note. 

Above: Euro to Dollar rate shown at monthly intervals with Fibonacci retracements of 2000 and 2017 uptrends indicating long-term areas of technical support for the Euro and resistance for the U.S. Dollar. Click image for closer inspection.