Fundamental Euro Forecast: Neutral
- After the recent falls in EUR/USD there are plenty of reasons to still be bearish, including weak German economic growth, another political crisis in Italy and a slow vaccine rollout in the EU.
- Moreover, little is expected from the coming week’s ECB meeting, with all the central bank’s key settings likely to remain unchanged.
- However, it is also possible that all the bad news has been priced in to the exchange rate already and that – barring a strong risk-off move that boosts the US Dollar – the Euro will spend the week stabilizing before perhaps weakening further.
Euro price outlook poor
The last few sessions have been terrible for EUR/USD bulls, who have had to cope with a firmer US Dollar, news that German GDP growth fell by 5% in 2020, yet another political crisis in Italy and a slow coronavirus vaccine rollout in the EU.
On the bright side, European Central Bank President Christine Lagarde was optimistic, predicting an economic recovery as Covid-19 uncertainty wanes and adding that the EU has all the tools it needs to overcome the crisis. A further flood of money into the perceived safety of the USD also seems unlikely given President-elect Joe Biden’s fiscal plans to stimulate the US economy and continuing monetary stimulus from the Federal Reserve despite talk that it might taper its asset-buying program.
Against this background, a period of stabilization seems likely but after that a further period of weakness cannot be ruled out despite the ECB’s concerns over the exchange rate and inflation – things it has little power to influence.
EUR/USD Price Chart, Daily Timeframe (October 14, 2020- January 14, 2021)
Source: IG (You can click on it for a larger image)
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ECB on hold
Usually, in a week when the ECB meets to determine its next monetary policy moves, all eyes would be on the meeting, and indeed Thursday’s announcement and subsequent news conference will be the focus of attention. However, its importance has been reduced by last week’s release of the minutes of the December meeting that included a comment that lowering yields further might have negative side effects and voiced concern again over risks related to developments in the exchange rate that might have negative consequences for the inflation outlook.
This suggests that the ECB will leave all its monetary settings where they are and that the meeting will leave the Euro unmoved – unless Lagarde missteps at the subsequent news conference.
Thursday’s Eurozone calendar
Inflation, ZEW and PMIs due
On the subject of inflation, final figures for Germany in December are released Tuesday and for the Eurozone as a whole Wednesday but as ever these will have little impact unless they are markedly different from the preliminary data published already.
More important are likely to be Tuesday’s ZEW economic sentiment index for Germany in January and Friday’s flash purchasing managers’ indexes, also for January. These PMIs are all expected to be a tad lower than in December, which would add to the general mood of pessimism around the Euro.
( 10:01 GMT )
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— Written by Martin Essex, Analyst
Feel free to contact me on Twitter @MartinSEssex