Analysis | January 20, 2021

EUR and Covid19 impact: outlook and forecast

We have noted in previous posts that negative bond yields are long term bearish the Euro – in this post we want to look at the impact of the pandemic on the zone which is much more severe than the market is seeing and also a correlation in terms of trading the euro which could impact going forward. The Market is focused on Europe recovering quicker from the pandemic than the US but this is not supported by the facts:

The Pandemic Impact – Market Discounting A Quick Recovery But It Wont Happen

“Euro zone finance ministers were discussing on Monday how to best design and coordinate economic plans to recover from the COVID-19 crisis, while the European Commission said the pandemic was exacerbating economic imbalances within the bloc.” (Reuters)

They noted that the pandemic was pushing already highly indebted countries deeper into debt and increasing problems in areas like competitiveness or employment. The weaker southern nations such as Italy, Spain, Portugal, and Greece have no chance of recovering this year to pre-pandemic levels in our view.

Even Germany is going to struggle going forward and it’s the powerhouse of the zone -According to the German Bundesbank, The German economy could suffer a “sizeable setback” if coronavirus curbs are extended again. Health Minister Jens Spahn has already said Germany will not be able to lift all curbs at the beginning of February and Angela Merkel has noted that they may even have to be extended beyond February end.

Chart 1: Comes from Goldman Sachs which shows the estimated impact on GDP going forward of major economies and the impact of the pandemic in Euro zone is far more than in the US:

Chart 2: The EU is worried about the spike in the virus cases and deaths which are on the increase and this increase is likely to continue until the cold weather peaks.

The Vaccine V Virus News and an Interesting Correlation

The Euro has also been supported by general risk-on in the markets – The market sold the USD on vaccines acting quickly to support a V-shaped global recovery and in response stock markets have soared but is the good news in the price? The chart below shows vaccine and virus news plotted against the SP500:

The Majority of investors see stocks continuing higher and they could but the vaccine euphoria is peaking and we expect stocks to chop sideways and there is a high probability of a correction which is bearish for the Euro. The chart below shows the correlation between EUR/USD and the SP500.

Conclusion

The market is seeing good news for euro zone going forward and it’s in the price we have already seen some euro weakness but expect far more to come. We don’t see the recent highs above 1.2300 being taken out and view the EUR as a sell on rallies – technical levels to watch below.

EUR/USD DAILY CHART: Resistance is at 1.2200 then 1.2270 while we may try and break first resistance we think we will fail into second level and think the odds of a move to chart highs are low – Speculators hold a big long position and we expect it to exit on stop and this in our view points to a move down to major support at 1.1600.

 

Research provided by LearnCurrencyTradingOnline.com

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