The Euro Bull vs The Euro Bear

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Fundamental Euro Forecast: The Bull vs The Bear

  • In this article, DailyFX Analyst Martin Essex puts the case for EUR/USD strength.
  • In the opposite corner, DailyFX Strategist Nicholas Cawley will argue later today that EUR/USD will weaken.

EUR/USD Outlook: Strength Ahead, argues Martin Essex, DailyFX Analyst

On the face of it, the case for EUR/USD weakness is compelling. The US is way ahead of the EU in vaccinating its people against the Covid-19 virus, the US economy will therefore recover faster than the Eurozone’s and it will tighten monetary policy first: giving the US Dollar a boost against a struggling Euro.

However, markets are rarely that simple. First, the policy-making Federal Open Market Committee made it very clear after its April meeting that it is not time yet to even discuss rolling back its emergency support for the US economy even though the economic outlook has brightened and price pressures will likely increase. Indeed, while stimulus will be slowly withdrawn in advance, market pricing does not suggest an increase in US interest rates until the end of next year even though US President Joe Biden is also planning a huge $1.8 trillion fiscal stimulus package.

Yes, the European Central Bank is not expected to raise rates until even further into the future, but market pricing has already adjusted accordingly. Moreover, if the global market mood improves further as a tapering of US monetary stimulus nears, the result might not be USD strength but weakness as the currency loses its safe-haven appeal and investors opt for so-called “risk-on” assets including the Euro.

This more optimistic tone can be seen already in the chart below of the spread between the currently positive yield on the benchmark 10-year US Treasury note and the still negative yield on the 10-year German Bund, the bellwether for the Eurozone. This spread has narrowed in recent months from more than 200 basis points to less than 190 basis points, removing some of the advantage in parking funds in the US money markets rather than the Eurozone’s.

US 10-Year Treasury/German 10-Year Bund Yield Spread (May 2019 – May 2021)

Source: Refinitiv

It is also becoming clear that after a very slow start the EU’s coronavirus vaccination program is picking up strongly even though it still lags well behind both the US and the UK.

EUR/USD Price Forecast: The Euro Bull vs The Euro Bear

As a result, some members of the ECB’s Governing Council are sounding more hawkish than ECB President Christine Lagarde, suggesting that a debate will soon start within the policymaking body – if it hasn’t already – about when to begin reducing its pandemic emergency purchase program (PEPP). Note too that the German Constitutional Court has paved the way for Berlin to ratify the EUs €750 billion recovery fund after its judges said they had not found any indication that approval would be unconstitutional. As the chart below shows, this has boosted EUR/USD already but it remains well below the highs just under 1.2350 reached at the start of this year.

EUR/USD Price Chart, Daily Timeframe (January 4 – May 4, 2021)

EUR/USD Price Forecast: The Euro Bull vs The Euro Bear

Source: IG (You can click on it for a larger image)

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More signs of a Eurozone recovery as the coronavirus pandemic is brought under control in the area abound. France, Italy and Greece have all moved to ease the restrictions imposed to curb the pandemic, while Spain and Portugal have both signaled their readiness to welcome British tourists under an EU covid vaccine certificate plan.

Further ahead, there are concerns amongst some Euro bulls about German elections due on September 26. The fear for the markets is that the Greens’ candidate for Chancellor, Annalena Baerbock, could win the race to succeed the retiring Angela Merkel. However, spread-betting companies still favor the more conservative Armin Laschet from Merkel’s CDU/CSU so those fears will probably prove unfounded, removing one possible barrier to EUR/USD strength.

— Written by Martin Essex, Analyst

Feel free to contact meon Twitter @MartinSEssex

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