Analysis | April 22, 2021

Outlook and forecast: ECB and EUR/USD

EUR/USD has rallied strongly to the upside but we have the ECB tomorrow so will we see more upside or a corrective break to the downside? Below our view of the fundamentals, sentiment and key technical levels of support and resistance.

“The European Central Bank will slow its emergency bond-buying by July and signal at the end of this year that the program will come to a halt in March 2022, according to a Bloomberg survey of economists.” ( Bloomberg)

Over 60% of respondents predict the ECB will stick to its current timeline for net purchases, and don’t expect any policy changes at next week’s meeting. ECB accelerated its pandemic emergency purchase program last month to increase liquidity for companies, households and governments so will they do as the market expects? If they do it largely discounted as speculators have bought the Euro up in recent weeks but we are not so sure the ECB will be as optimistic as the market expects.

“The near-term outlook for the eurozone remains weak given the tight grip of the third infection wave, and despite the recent pick-up in the vaccination pace. (Oliver Rakau Oxford Economics.) who predicts the ECB will continue to buy bonds at an accelerated rate up until September which we agree with the state the EU economy generally is weak especially for the southern Poorer nations such as Italy, Spain and Greece…

Even if we do see the emergency program wound down there is still a big gap between the EU and US economy. “We think that the fast rate of vaccination, falling virus case numbers and an earlier lifting of restrictions in the US will continue to put greater upward pressure on government bond yields there than in the euro-zone. The ECB has expressed a greater willingness than the FED to push back on rising government bond yields.” (Capital Economics)

The EUR has also risen as US bond yields have dipped in recent weeks but we expect them to move higher relative to euro yields in the coming weeks if we look at the gap at present its 0.2% on the German bund v nearly 1.6% on the US 10 Year Note. The gap is bullish for the USD and bearish for the EUR and likely to widen as inflation expectations in the US are ahead of those for the EU

The Outlook for EU V US Economy 3 Charts

 The first chart shows consumer confidence and the US consumer is far more optimistic than the EU consumer and with good reason – the second chart shows growth expectations V the EUR/USD exchange rate. Finally, we have a chart of yields and over the longer term point to a weaker EUR.

Technical Analysis EUR/USD

We have seen a strong rise in the EUR but in the last two days we are seeing low volatility as we stall below the 1.2100 level. In terms of trading the short side we would focus on the big round numbers. If we rally up to our above 1.2100 we would look for price weakness to sell with a stop back behind second resistance behind 1.2200 however if we don’t rally, we would look to sell back below the 1.200 level with a stop back behind the 1.2100 level. Target on both entries would be a move back down to recent chart lows.

 

 

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