EUR/USD Heads Towards 0.9900 As Currency Traders Rush To Safety

Key Insights

• EUR/USD remains under strong pressure as traders focus on the energy crisis in the EU. 
• GBP/USD is also moving towards yearly lows. 
• Judging by today’s market action, traders expect hawkish comments from Fed Chair Jerome Powell.

The U.S. Dollar Index managed to gain strong upside momentum and moved back above the 109 level. At this point, it looks as though the euro and the British pound will need significant catalysts to break the strong downside trend.

EUR/USD

EUR/USD is moving towards the 0.9900 level as traders remain worried about the future performance of the European economy.

European natural gas markets will feel even more upside pressure as Freeport LNG will not resume its operations until late November. Higher natural gas prices will lead to higher inflation and economic losses.

European government bond markets feel the heat. The yield of 10-year France government bonds is trying to settle above the 2% level. At the start of August, these bonds yielded 1.35%.

Italy’s 10-year bonds yield 3.70%, presenting a huge problem for the ECB, which is expected to sell higher-quality bonds to buy bonds of countries like Italy and Greece in order to push their yields lower.

As higher natural gas prices will boost inflation, ECB will have to keep raising the rates at a time when its weaker members are already struggling from higher bond yields. While a true Eurozone debt crisis is by no means guaranteed, traders should keep a close eye on the developments in the European government bond markets.

From a technical point of view, EUR/USD remains weak. RSI is close to the oversold territory, but there is enough room to gain additional downside momentum. A move below the 0.9900 level may lead to another strong sell-off.

GBP/USD

GBP/USD is also moving towards yearly lows as the U.S. dollar continues to gain ground against a broad basket of currencies.

Today, the U.S. released the Durable Goods Orders report for July, which indicated that Durable Goods Orders remained unchanged, while analysts expected that they would grow by 0.6%.

Pending Home Sales declined by 1% month-over-month in July. On a year-over-year basis, Pending Home Sales decreased by 19.9%.

The reports had no material impact on the U.S. dollar. Traders continue to prepare for the Jackson Hole Symposium and expect hawkish comments from Fed Chair Jerome Powell, which is bullish for the U.S. dollar.

For a look at all of today’s economic events, check out our economic calendar.