09.09.202217:03 Forex Analysis & Reviews: EURUSD correction potential is limited

Falling gas prices, the ECB's determination, the growing chances of getting a strong Italian government and expectations of a slowdown in US inflation allowed the EURUSD bulls to launch a counterattack. The pair soared above 1.01, but then was forced to retreat. And investors had a feeling of deja vu. If the stock market's campaign against the Fed turned into a rout in the summer, why wouldn't this story repeat itself in the fall?

If the increase in the deposit rate by 75 bps and Christine Lagarde's speech did not particularly impress the EURUSD bulls, then the S&P 500 rally gave them a helping hand. According to Bloomberg experts, consumer prices in the United States slowed from 8.5% to 8.1% in August, which in theory, could reduce the speed of the Fed's monetary restriction and weaken the dollar. At least, after the release of data on July inflation, stock indexes and the euro rushed up together.

Then it all ended sadly. Just a few days later, the S&P 500 reached a local high, after which it sank 9%. The Fed has made it clear that it does not intend to stop until it has done its job. The federal funds rate could rise to 4% by the end of 2022, which is forcing stock indices to think twice about rallying.

The dollar is still strong, but the euro is also doing well. First, the ECB's monetary policy has become much more transparent than before. The European Central Bank followed the path of its American counterparts, turning a blind eye to a potential recession. This increases the risks that borrowing costs will increase by 75 bps in October. Second, polls show that the coalition led by the Brothers of Italy can gain 252–262 out of 400 seats in the lower house of parliament and 125–133 out of 200 in the upper house, which will be enough to change the Constitution without a referendum. A strong government in a troubled country is good news for EURUSD.

Dynamics of popularity of political parties in Italy

Finally, by blocking the Nord Stream, Russia used its last trump card in the gas war. The expectation of death is worse than death itself, so as soon as the taps were turned off, investors realized that the worst had already happened. The initial shock sent blue fuel skyrocketing, but then prices went down, supporting the euro.

In all three cases, with the ECB, the Italian policy and the energy crisis, uncertainty has decreased, which was a breath of fresh air for the EURUSD bulls. With the support of US stock indices, they rushed to the attack. However, in my opinion, the potential for correction seems limited. The armed conflict in Ukraine and the gas crisis have not disappeared, and the Fed is determined.

Technically, on the EURUSD daily chart, a rebound from the moving averages, followed by a drop to the low of the breakout bar, where the fair value of $1 per euro is also located, is a sell signal. Updating the local high at 1.0115 may become the basis for short-term longs, followed by a transition to medium-term shorts on the rebound from 1.018 and 1.022.