European markets traded moderately in the red on Wednesday, taking over the bearish baton from the US market, whose capitalization shrank on Tuesday. Investors are actively dumping European assets, as the threat of the gas crisis spreading to the financial sector grows, threatening to launch a wave of bankruptcies. European governments, probably with some delay, are developing mechanisms to isolate the economy from the energy crisis, including: limiting the wholesale prices at which gas is purchased from Russia, taxing excess profits, or capping the prices of energy companies in the green energy sector that are raising prices along with traditional producers, issuing special credit facilities for electricity suppliers, who are facing soaring borrowing costs due to declining margins (due to fixed selling price in contracts), and compensating utility bills to poor households, while promoting energy rationing.
The pumping of gas through the Nord Stream pipeline has been completely stopped, given the ultimatum conditions of both parties, it is unlikely to resume in the near future. European countries have achieved some acceptable results in filling gas storages and preparing for winter. Consequently, the demand for European currencies becomes a function of the effectiveness of the actions of European governments in overcoming the existing imbalances in the energy system of the EU and the UK. In other words, investors are asking themselves the question whether European countries will be able to prevent unforeseen bankruptcies that could shake the financial sector. It will take time to answer this question, so the credit risk premium in European assets is set to rise in the short term.
European currencies are under serious pressure, the British pound has suffered more than others and collapsed to 1.14. Given that sellers are approaching the level for the second time, and that uncertainty is growing, there is a high probability of a breakdown and a new low this week (1.13-1.1350). The fall of the Euro is constrained by expectations that the ECB will raise rates by 75 basis points on Thursday. Just under half of the economists surveyed by Bloomberg expect this outcome. Most expect the ECB to raise the rate by 50 basis points, but most likely EURUSD will fall to 0.96 on such a decision:
The yen is in free fall, USDJPY has crept close to the round mark of 145 yen per dollar. The Bank of Japan has not yet commented on the fall; however, the last few days of parabolic movement increase the chances of foreign exchange intervention, or at least verbal warnings about interventions in the foreign exchange market. In addition, the weekly chart shows that the price is approaching the level of 146 (the peak value of August 1998), which can work as a powerful resistance: