Europe is overwhelmed by a panic in the face of a full-blown energy crisis. Natural gas prices in Europe have hit record highs, though yesterday gas closed lower at $700 per 1,000 m3. The thing is that previously, the price had surged to $970 per 1,000 m3. Nevertheless, even the current gas price is vastly inflated. The worst is yet to come because European countries are still not ready for the heating season. In the best case, energy inventories have been filled by 75%.
According to cautious estimates, inventories are half full.
Energy stocks are commonly replenished in the summer. However, this time energy prices had already been elevated. So, many countries cherished hopes that OPEC and its allies would agree to scale up oil production quotes. Anticipating lower oil prices, consumers did not fill in their stocks. In practice, the cartel and its allies protracted the negotiations that were accompanied by scandals. Such developments pushed oil prices up.
After the painstaking talks had been complete, consumers were out of time to replenish their energy inventories. Energy demand was enormous due to heat waves across most EU countries. As air conditioning was on nonstop, energy demand was the same as in the cold season. In other words, energy supplies were depleted as quickly as a wink.
Eventually, Europe ended up running out of time to replenish energy supplies on the back of virtually empty storage. Sparse supplies boosted great demand which exporters were not able to meet. To make things worse, energy prices have zoomed up, gas prices in the first place. Most market participants view yesterday’s slide in gas prices as a temporary move. Curiously enough, it was the reason for a slump of the single European currency. Energy shortage sets the stage for both CPI and PPI growth as well as contraction of industrial production. In turn, the latter will propel inflation to incredible highs. All in all, the EU economy is running a grave risk of plunging into recession.
This story is dominating the headlines so that investors downplay other news and events. The market neglected retail sales data from the US which came in beyond expectations. Retail sales remained flat in August, though analysts had expected the indicator to fall to 13.0% from 15.1% a year ago. Besides, retail sales actually grew 0.7% on month, contrary to the expectations of a decline to -0.7%.
The weekly update on unemployment claims also could have aroused optimism, even though the number of initial unemployment claims actually increased 20,000 instead of the expected contraction of 12,000. On the plus side, the number of continuing jobless claims dropped a whopping 187,000, much sharper than a 72,000 decrease in the consensus. When it comes to the currency market, the US dollar lost its footing because it had no more space for growth, having exhausted its rally.
US Retail Sales, y/y
The market is alert to the EU inflation data which is due today. This is the revised CPI for the whole euro block. Following the publication of the flash estimate, the market had already priced in the CPI growth to 3.0% from 2.2%. Currently, investors are unnerved by the situation in Europe’s energy market. Due to inflated energy prices, consumer prices are doomed to soar in the nearest future. Therefore, trends in the currency market will be sensitive to the information on how energy inventories are being filled as well as a dynamic of spot gas prices.
EUR/USD was hovering around support of 1.1800 for 30 hours. Eventually, it was broken downwards. This triggered an inertial move that broke 1.1770, the swing low of Sept.13.
In light of the sharp trend reversal, EUR got overbought, which was confirmed by the RSI indicator. The technical tool sank for a while below 20, which is considered a critical level. So, traders received a signal to buy EUR.
According to the daily chart, traders are monitoring the upward move after the downward correction that lasted from Aug. 23 until Sept. 3.
Outlook and trading tips
We can assume that the upward retracement could be temporary and the currency pair may resume its downtrend. The levels of 1.1770 and 1.1800, which have been passed earlier, are seen as resistance.
Traders will increase short positions on EUR/USD as soon as the price holds firmly below 1.1750. This will open the door towards 1.1700 – 1.1670.
Complex indicator analysis is generating a buy signal amid a temporary upward retracement. At the same time, technical tools on shorter time frames are generating a sell signal amid the overall downtrend.