Is it safe to buy EUR/USD after reaching the lowest in two decades?

The US dollar continues its rally against the euro as reflected by the EUR/USD exchange rate dropping to a two-decade low. The pair traded as low as 0.99 yesterday, in what seems to be an almost vertical drop since the exchange rate was at 1.20 in early 2022.

Several factors weigh on the common currency.

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First, the interest rate differential between the two central banks. While the European Central Bank did hike the key interest rates from record low levels, the Federal Reserve raised the rates faster.

Moreover, it plans to keep doing it, pressured by elevated inflation levels.

Second, the war in Ukraine led to surging energy prices. Europe’s dependency on Russian gas translates into more gas imports from the United States at record-high prices. To pay for it, Europeans sell euros and buy dollars.

Third, the long-term technical picture reveals the breaking of a massive support level. For years, the EUR/USD bounced from the pivotal 1.05 level. Not anymore.

Energy prices weigh on the common currency

The decline in the eurozone’s trade balance is mostly triggered by the energy crisis. By paying high prices in international energy markets, European nations indirectly contributed to the weakening of the common currency.

But isn’t a weaker currency good for exporting nations?

Indeed, it is. However, when inflation is on the course of reaching double-digit territory, a weaker currency is not desirable. Because of it, traders keep betting that the European Central Bank will not tolerate further EUR/USD weakness.

The Russia-Ukraine war triggered record high levels of natural gas prices

Natural gas prices in Europe have reached extreme levels. In a race to reduce the dependency on Russian gas, Europe increased its imports of US gas.

Nowadays, a single gas shipment from the US to Western Europe nets as much as $200 million in profit. Therefore, the war puts America at an advantage as the conflict is far away from it and, at the same time, it profits from the energy crisis.

EUR/USD remains bearish while below the 1.05 pivotal level

It is difficult to see where the EUR/USD will go next.

But if we are to interpret the bigger picture, the current drop below 1.05 looks significant enough not to be ignored. In other words, the EUR/USD remains bearish while below the pivotal level, and any bounce should be viewed as an opportunity to short.