EUR/USD has a chance for a countermove

Neither rising oil prices nor the stabilisation of Treasury bond yields nor the rebound in stock indices is helping the US dollar. Investors increasingly view the risks of a repeat of the 2012 European debt crisis and the 2022 energy crisis as exaggerated. If so, the sell-off in EURUSD has gone too far. The bulls now have a chance to stage a comeback.

Rumours that Qatar and Pakistan have put forward a new proposal to resume talks between the US and Iran have led to increased volatility but have had little impact on Brent prices. European gas, however, reacted with a sharp fall. At present, there is no question of an energy crisis, as prices are still far from the 2022 peaks, despite storage facilities in Europe being only 75% full – a record low for this time of year.

Franklin Templeton Fixed Income argues that France, with its €3 trillion economy and €3.6 trillion in debt – ten times Greece’s during its crisis in 2011–2012 – poses a far greater threat to the eurozone than the PIGS did 14 years ago. On the other hand, France’s share of global GDP is less than 3%, half of what it was in 1980. Despite France’s debt burden rising to 119% of GDP, the currency bloc’s overall debt burden has fallen since the Greek crisis, now standing at a manageable 89%.

According to BlackRock, the region is far better prepared for financial stress than it was back then. Banks are stronger, and the ECB has vast experience and the tools to stabilise markets. Yet it was precisely the banking system that contributed to the European debt crisis in 2011–2012, as credit institutions were burdened by the debt of the eurozone’s peripheral countries. At present, banks’ share prices – with the exception of French banks – are showing no sign of falling.

If there is no repeat of the European crisis of 14 years ago, the sell-off in EURUSD has gone too far. The euro is gaining momentum for a rebound, supported by a pause in the Fed’s rate rises until December. Furthermore, there is a high chance that the Democrats will gain control of Congress following the midterm elections and will then throw a spanner in the works of Donald Trump’s inflationary policies.

Summary: EUR/USD may rebound if the risks of a new European debt crisis are exaggerated, the Fed pauses until December, and the dollar gets no help from oil, yields or equities.