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Euro collapses to a 5-year low

Europe is still heavily reliant on Russian fuel, as they have not been able to come to a consensus view on banning imports or securing a replacement deal with a friendly country or countries. Today, however, Russia cut two European countries' supply of natural gas as they had previously warned that they required payment in Roubles. Europe is unwilling to purchase Roubles to make these payments, so Russia acted accordingly. It just so happens that Poland is especially critical of Russia, which is allowing Western countries to supply Ukraine with weapons crossing the border from Poland into Ukraine. The euro is now at a critical level on the path to parity with the US dollar, so it will be interesting to see if this news along with sentiment data was used to scare people into going short.

Market Brief

If there were to be a final push lower to end the EURUSD decline, today’s news could have been the catalyst. The sweep of the pandemic lows could be the setup and now we’re waiting to see if the 1.0600 level holds, or whether the situation in Europe is about to get a lot worse. The consumer confidence data from Germany deteriorated significantly in April for the second month in a row. Both economic and income expectations along with the propensity to buy have noticeably declined.

GfK’s forecast for a drop of -26.5 points for the consumer sentiment in May, is a decrease of 10.8 points from April of this year. The situation in Ukraine is stepping up to a new level as Russia turns off the gas taps to Poland and Bulgaria, so it is unlikely that this gets revised higher.

Gazprom confirmed this morning that it stopped supplying Poland and Bulgaria with gas because of the two countries' failure to pay for Russian gas in roubles. The warning had come out of the Kremlin yesterday and the euro had reacted negatively then.

The company added that the suspension will last until Russia receives payments in roubles.

European Commission President Ursula von der Leyen stated this morning that Russia's decision to cut gas supply to two European Union members, Poland and Bulgaria, is

"another attempt by Russia to blackmail us with gas."
"We are prepared for this scenario. We are mapping out our coordinated EU response. Europeans can trust that we stand united and in solidarity with the Member States impacted,"

Von der Leyen stated.

"We will also continue working with international partners to secure alternative flows. And I will continue working with European and world leaders to ensure the security of energy supply in Europe."

The DAX had led the other European bourses lower but could be nearing an end to its rout as the Bollinger Band %B indicator shows prices have already closed below the lower band of the volatility bands. Signaling a possible reversion to the mean. The US indices and FTSE have remained positive, so now that the Gazprom uncertainty is potentially priced in, we could rise into the month-end.

The Australian dollar is still trading within the price range printed yesterday following the overnight release of the Australian Consumer Price Index (CPI). Inflation as measured by CPI rose 2.1% during this latest quarter. Over the twelve months to the March 2022 quarter, the CPI rose 5.1%. The LTM rise beat market expectations and is the highest since the early 2000s. The most significant price rises were new dwelling purchases by owner-occupiers (+5.7%) and Automotive fuel (+11.0%). The chart above shows the AUDUSD had previously been closing at the lower edge of the Bollinger bands which could signal a reversion back to the daily 200-period MA, though the current trend is bearish and a test of the 0.7000 is still my base-case scenario for now.

The forex heatmap is showing that the Australian dollar is leading the commodity pairs higher today, which is a risk at the start of the London session. The Japanese yen is currently the weakest currency followed closely by the Swiss franc and the euro.

Traders will be also prepping for the Bank of Japan’s latest monetary policy update, which is due to drop early tomorrow. It is not expected to make any immediate policy changes. However, of particular interest will be whether it has anything new to say about this year’s sharp slide in the Japanese yen. In the Eurozone, European Central Bank head Lagarde is set to speak but her remarks may not touch on monetary policy.

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