Given that market participants are very pessimistic about the euro, a pullback is possibleItaly is on the brink of chaos as Mario Draghi has less than a week to forge some difficult compromises with the populists in his government that have reluctantly backed him for the past 18 months. Germany's authorities are afraid that Russia will not resume gas supplies to Germany via the Baltic Sea pipeline Nord Stream 1, which has been halted for 10 days for annual maintenance work. They are concerned tha this could provoke an almost 9% decline in GDP. The ECB continues to push for a modest 25bp hike in the deposit rate, while the Fed could surprise the markets by a 100bp rate increase in July. Well, there are too many negative factors for EURUSD, aren't they? Most of them have already been priced in by investors. However, the failure to easily reach parity hints at the weakness of bears. Is it time for a correction?

Spurred on by safe-haven asset purchases and expectations that the Fed will accelerate the pace of its restrictive monetary policy amid surging inflation, the US dollar index has gained 4% over the past three weeks, notching its best dynamics since 2020. At the same time, market participants continue to get rid of the euro. Hedge funds have driven net shorts on the single European currency to their highest levels since December 2021.

Dynamics of speculative positions on EUR

Against this background, there are a lot of negative forecasts for the EUR/USD pair. Nomura believes that if Russia does not resume gas supplies via the Nord Stream 1 pipeline, the euro will fall to $0.95 by late August and then head for $0.9. According to BlueBay Asset Management, such problems as gas problems and an armed conflict in Ukraine are unlikely to disappear soon. Thus, the major currency pair will inevitably drop to 0.95. Citigroup warns that the euro's failure to consolidate above parity will trigger its erratic move towards the 0.9-0.95 area.

At first glance, fears of a recession in the German economy due to a complete halt to gas supplies through the Nord Stream pipeline and a political crisis in Italy force the ECB to act cautiously. According to Bloomberg experts, the European Central Bank will raise the interest rate by 25 basis points in July, by 50 basis points in September, and by 25 basis points at each of the remaining meetings in 2022. Economists expect the rate to peak around 1.25% in 2023. As for the anti-fragmentation program, 90% of specialists consider it unlimited in size. Two-thirds predict that the ECB will be forced to use it.Interestingly, Bloomberg experts believe that most of the volume of reinvested earnings from bonds will go to Italy.

Outlook for purchases of bonds through ECB reinvested earnings

According to forecasts, the European Central Bank may surprise investors with a 50 bp interest rate hike on July 21. If Russia resumes gas supplies on the same day, euro bulls will rush into a counterattack. However, markets are growing on expectations, so a correction may begin earlier.

From a technical point of view, the EUR/USD pair continues to form a broadening wedge pattern on the 4-hour chart. If the price hits a new local high at point 3 and forms point 5, it will be possible to consider long positions amid a breakout of the resistance level at 1.012.