Safety plays prevail in FX, equity and bond markets on Tuesday, as evidenced by lower prices for risk assets, a strengthening USD and increased demand for long-term bonds. Reports about Russia gas flows to the EU are becoming almost the only driver of short-term sentiment for the Euro and the British pound, overshadowing even the policy of central banks. For example, reports that Russia restored gas supply via the Nord Stream 1 at 40% of normal capacity after the completion of maintenance, helped investors to price out worst-case scenario of EU’s energy crisis, causing the EURUSD to rise from 1.00 to 1.0250. However, the optimism did not last long, today's reports that gas flows decreased from 40% to 20% sent the European and British currencies into a nosedive. The EURUSD traded below 1.0150 and the GBPUSD broke the 1.20 foothold.

The European Commission, together with the countries of the bloc, developed a plan to “proactively reduce gas consumption” due to the risks of a complete halt in gas flows from Russia through the Nord Stream 1 pipeline. Reduced energy consumption will most likely cause a recession in the EU and these apprehensions cause risk premia on European risk assets to build up. The German DAX is down by 0.9% today, the index of Europe's largest companies STOXX 500 fell by 0.5%.

Mounting EU recession risks force investors to buy more long-term bonds: the yield to maturity of 10-year German bonds fell by approximately 10 bp from yesterday to 0.94%, the lowest level since the end of May:

Oil prices rose on expectations of rising demand as a substitute to gas, although the gains were moderate. Brent spot price climbed above $107 per barrel.

The situation is likely to continue to escalate as the EU seeks ways to reduce consumption while Russia continues to cut supplies. That is, the tug-of-war continues. Accordingly, the outlook for an EU economic damage is poised to deteriorate further, which will likely drive the European currency lower. The risk that the EURUSD will soon test parity is set to increase and speculative pressure will likely contribute as well on the presence of a clear-cut bearish factor.

From a technical point of view, the EURUSD left the short-term range and entered the bearish channel, which increases the odds that the pair will retest parity:

The set-up in the GBPUSD is similar: theprice failed to break through the upper bound of the trend corridor and maysoon halt the recovery within the short-term upward channel. In this case, thenext target may be the level of 1.18: