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EUR/USD Spot Rate Sleeps at Key Support: What Next?

EURUSD Forecast
EURUSD Forecast

The EUR/USD price has continued to consolidate on Tuesday morning after the latest decision by the European Union (EU) on gas prices cap. It was trading at 1.0600, where it has been in the past few days. This price is about 9% above the lowest level in November and a few pips below this month’s high of 1.0720.

EU natural gas price cap

On Monday, the European Union members agreed to cap natural gas prices at 180 euros per megawatt hour. The goal of the price cap is to limit inflation and economic damage. The impact of this cap will likely be limited for now since gas prices are averaging 110 euros per megawatt hour. The cap is also slightly below its highest point this year.

Still, the cap will likely have an impact in the long term. If gas prices remain at an elevated level, there is a likelihood that traders will avoid Europe in search for countries that pay a higher price. Lower demand will then lead to higher prices. Another likely impact of the price cap is that the unregulated over-the-counter market will do well. 

In a report, analysts at ING warned that European gas prices will remain at an elevated level in 2023. With Russian gas out of the market, it will almost be impossible for Liquified Natural Gas (LNG) from the US and other countries to offset the gap.

EUR/USD latest news: US housing data

The next key catalyst for the EUR/USD price will be the upcoming US building permits and housing starts data scheduled for Tuesday. Economists expect that building permits in the country dropped from 1.52 million to 1.48 million. Housing starts, on the other hand, are expected to have dropped from 1.42 million to 1.4 million.

In all fairness, these numbers, while important, will have no major impact on the pair since the Fed has already delivered its decision. It decided to hike interest rates by 0.50% and hinted that it will continue hiking in 2023. As a result, bond yields have surged since the decision.

EUR/USD forecast

The chart below shows that the EUR to USD exchange rate moved sideways on Tuesday. It is hovering at the lower side of the ascending channel shown in black. The EURUSD price is also consolidating at the 25-day and 50-day moving averages while the MACD has formed a bearish divergence pattern. 

Therefore, I suspect that the pair will bounce back and retest the upper side of the channel at 1.07140. A drop below the support at 1.0580 will invalidate the bullish view.