Technical Analysis

Energy Crisis, European Economy, and Euro

Energy is a crucial sector for the EU economy and is essential to strengthening the global position of the euro. Therefore, the current European energy crisis challenges the region’s economic stability and the single currency. Let’s dive deeper into the situation to see what awaits the Eurozone and the EUR.

What happened?

The events this year have unfolded rapidly. After the first European sanctions against Russia, which had invaded Ukraine, the flow of Russian gas to the continent started declining. Then Russia decreased shipments through the Nord Stream 1 gas pipeline to 20% of its capacity until they were utterly interrupted after the September sabotage.

These events have shown that gas deliveries are now a weapon of war, accentuating the economic slowdown, causing energy shortages, high inflation, and high prices that are already influencing the energy-intensive industry, putting competitiveness at risk.

The European response

Beyond the recent interest rate increases by the European Central Bank (ECB) to contain high inflation, the European governments started subsidizing households and industries that faced rising energy costs. Simultaneously the authorities focused on replenishing national gas reserves to cover winter needs with imported Norwegian gas and liquefied natural gas (LNG), coupled with small increases in supply from Algeria and Azerbaijan.

Furthermore, installing new floating storage and regasification units in Germany and Italy aims to improve supply, although it will become operational only in mid-2023.

Additionally, on October 20 and 21, 2022, the EU leaders called on the Council and the Commission to urgently present concrete decisions on additional measures, including:

● local measures to curb demand,

● joint voluntary gas purchases,

● a new index supplementary gas benchmark,

● a temporary dynamic price corridor in natural gas transactions,

● a temporary framework to cap the price of gas in electricity generation.

The efforts of the EU brought results. According to Reuters, European gas reserves are 95.4% full, which seems like an achievement given the overall situation.

Technical scenario for the euro and the EU50

The euro and the European indices have been under pressure throughout the year. The trading instruments declined not only because of the war, energy crisis, and inflation but also due to the strength of the USD in the face of aggressive interest rate increases by the Fed.

At the same time, since October, the euro and the European indices strengthened as inflation showed a moderate reaction to the ECB rate hikes, and the region regained some energy security.

EURUSD is trying to break the upper limit of the downtrend channel. It has reached September resistance at 1.02, a major September sell zone that may reactivate bears in the pair. If the pair fails to break this level, we’ll see a decline at least towards the upper limit of the broken channel in the short term and the current November support at 0.9727.

However, the break of the 1.02 resistance will continue to strengthen bulls looking for the next bid zone around 1.0354, July support, and August resistance, from where sellers will be active again.

As for the EU50, it is testing the selling area for ​​June and August. From there, we could see a drop to at least 3,683 and 3,490. However, the breakout of the indicated sell zone will encourage the bulls to continue toward the April and March highs in the 4,000s if optimism continues.

What could happen in 2023?

If we attempt to look further into the future, the combination of supply and demand factors will continue to weigh on market sentiment.

On the one hand, gas reserves may run out in early 2023. The price crisis will exacerbate if the market has difficulty meeting the demand for gas. On the other hand, gas demand may decline as the region chooses alternative fuels such as coal and diesel. Industrial consumption may also drop due to economic pressure and energy inflation.

No matter what lies ahead, competitiveness and confidence in the euro area are in danger due to the energy crisis. This factor will keep weighing down the euro and the indices.

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