EUR/USD has had a big move to the upside and speculators are heavily long… The bullish scenario is based on a hawkish ECB, the euro zone will only have a mild recession as the energy crisis is resolved, China a major trading partner will recover now Covid restrictions have been eased and the USD will fall as the US economy is heading for a recession so the Fed will ease interest rates …

It's an optimistic scenario but …

As we can see later on the chart a hawkish ECB Failed to help the EUR Hold the 1.070 level.

The view that eurozone will have a mild recession is not supported by the data check our previous articles on this.

The energy crisis, for now, is not a focus of investors but will return in 2023

China won’t recover – it's heading for a recession which we have noted in previous articles

A US or global recession which is likely is out and out bullish the USD on its global reserve status.

It's as good as it gets for the euro bulls, and we are looking for a breakdown.

Also, we can add in economic surprises, the EUR/USD SPX correlation, and the USD’s role as a global reserve to warn of a correction to the downside in EUR/USD...

Economic Surprises

The gap has now become rather wide and we don’t think this will continue with EU economic surprises above US surprises.

EUR/USD SPX Correlation

We can see it on the chart below and expect the gap to narrow with the euro falling back on the USD to close the gap.

Sentiment

Large speculators - hedge funds on the 2 charts below have a major long position that is vulnerable to a stop hit.

US and Global Recessions are Bullish USD

Always keep in mind this simple chart…

Goldman's Rich Pivorsky remains skeptical about Europe, believing that its recent success is due to positioning and technical factors rather than strong economic fundamentals. He adds that over the past decade, there have been periodic periods of time where Europe has performed relatively well, but these gains have not been sustained. He expects this pattern to continue in the coming year, with Europe's economic prospects being gloomy. We agree...

Technical Analysis

The key levels of support or resistance to look out for are on the charts below the first from us and the second from TME.