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EURO

Euro in Danger Amid Italian Elections: Will Russia Terminate Nord Stream 1?

PIPELINE FOR NORD STREAM 1

As the effects of the crisis in Ukraine continue to spread throughout the European continent, natural gas futures prices have been rising. Recently, the operator of the Nord Stream 1 pipeline in Russia, Gazprom, cut natural gas shipments to Europe by 40% while performing regular maintenance on the network.

The corporation recently said that it will reduce even that capacity by half, citing challenges finding turbines as well as technical legal issues brought on by penalties. Currently, only 20% of the pipeline’s capacity is anticipated to be used for gas flow. To put things in perspective, around 40% of Europe’s gas and 30% of its oil come from Russia.

Policymakers in the West have charged Moscow of energy extortion and revenge for sanctions imposed by the US and EU in reaction to Russia’s invasion of Ukraine. Vladimir Putin, the president of Russia, issued a warning that extra economic measures would cause energy prices to rise sharply for consumers everywhere, devastating the global economy.

The timing is terrible for Europe. The European Commission proposed last week that each of the 27 EU members cut their gas use by 15% over the next eight months. The EU’s executive body emphasised that national leaders should specify which industries to prioritise in the event of a gas scarcity.

The strategy, though, might be revised to provide exclusions for certain areas and businesses. This week, energy ministers will meet to continue talking about ways to prevent the political and social instability that would result from severe gas rationing in Europe. The greatest concern is a complete Russian gas interruption over the winter.

At least for the time being, Mr. Putin is unlikely to fully shut off the metaphorical faucets. Moscow’s residual leverage would be meaningless, and decades of effort building up a trustworthy partner to use extra gas would be undone. As opposed to playing all of its cards and hoping for the best, slowing slowly gives Russia opportunity to get concessions.

Europe is already having difficulty supplying its subterranean energy storage in advance of the winter season’s peak demand. This might result in decreased productivity, job losses, and a restructuring of regional supply networks for businesses depending on gas in addition to decreased consumer consumption.

How would this seem to the bloc? According to the International Monetary Fund (IMF), Italy, the third-largest economy in the Eurozone, may suffer a drop in production of as high as 5.7 percent. Germany, the ostensible “economic powerhouse” of the Eurozone, might see losses of about 3%. The storm clouds of a recession may be forming as a result of increasing food costs and tighter lending standards both locally and internationally to combat growing inflation.

This might increase the negative risk for European equities markets in the midst of increasing rates on government bonds, especially for Mediterranean nations. The US Dollar, which has an edge over the Euro in terms of yield and unmatched liquidity, continues to decline versus the Euro.

A bloc that depends on the unity of several varied country states that were, until relatively recently in historical terms, at war with each other might run into problems as a result of political, economic, and financial turbulence. Right-wing or nationalist parties get a percentage point greater vote share for every percentage point drop in growth, according to The Economist. Where might we see this happen?

EURO
ELECTION IN ITALY – AGAIN?

It so happens that an election is scheduled for September in one of the original members of the Eurozone. In the polls, Giorgia Meloni, the head of the post-fascist Brothers of Italy party, is leading. Former ECB president Mario Draghi just resigned from his position as Italy’s Prime Minister after failing to bring his coalition together. He has been asked to stay on until a replacement is found by President Sergio Mattarella.

The turmoil of 2018—which saw a general election followed by a “Battle of the Budgets” between Rome and Brussels—might repeat itself for the euro and Italian bond yields. Sovereign bond rates may fluctuate more widely and the amount of money leaving the Euro may rise in the run-up to the election.

FOMC RATE RESOLUTIONS

The Fed is expected to increase its target policy interest rate by an additional 75 basis points, on top of the three-quarters increase in June, according to traders. Monetary authorities are intensifying their tightening efforts in response to the inflation crisis. Where might volatility arise if the increase has already been factored in?

The remarks and outlook of Fed Chairman Jerome Powell will probably cause market anxiety. Investors have already factored in a 25 basis point drop for May 2023, but they could be anticipating too much. Therefore, if a regime of relatively higher rates seems to be on track to become the “new normal,” a firm Fed at this meeting might push markets into a protective posture.

Unexpectedly hawkish remarks may help the US Dollar, reviving selling pressure on the EUR/USD following the pair’s recent rebound. That little increase came after a sharp decline earlier this month that briefly touched parity. Equity markets, which have benefited from an ultra-accommodating credit regime for more than ten years, might also panic. Spillover could affect different types of assets.

TECHNICAL ANALYSIS OF EUR/USD

After falling to a 20-year bottom, the EUR/USD has recovered and may shortly retest a descending resistance channel that dates back to March. The two made many unsuccessful attempts to climb the slope of degradation before giving up and continuing to descend. Although the urge to sell seems to be off, the little reprieve could just be that.

The macroeconomic conditions continue to indicate a bleak picture for EUR/USD. As risk premiums get skimpier and the likelihood of a reversal rises, traders may have been leaving their short positions, which may be what caused the current bounce. Even if the pair overcomes March opposition in the future, the path to recovery will be difficult and drawn-out.

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