We had the ECB meeting last week and we expect the EUR to sell off to the downside after its recent rally. Our view of the fundamentals, sentiment, and Technicals below…
ECB Monetary Stimulus Bearish the Euro
“The European Central Bank signaled it will only slightly reduce its emergency bond purchases over the coming quarter, as widely expected. The ECB, while taking a token step towards unwinding the emergency aid, gave no signal of its next policy move, including how it might dismantle the 1.85-trillion-euro Pandemic Emergency Purchase Programme (PEPP), which has kept borrowing costs low for governments and businesses.” (Reuters)
The above was the view of the market but did they taper bond buying? No, they didn’t as Nordea points out: “We note that the ECB still intends to recalibrate the combined QE purchases to the net supply of bonds, which will ensure that the de facto curve spread control (Periphery to Core) remains intact. There is no plan to lower the projected balance sheet size into 2022/2023 compared to the earlier anticipated wallet size, why this is clearly not a tapering process.”
The size of ECB stimulus can be seen on the chart below and its a lot bigger than the Fed relative to GDP. Also keep in mind the ECB said they could increase it which we think they will
We have no indication from the ECB of when interest rates might rise because at this point in time with an economy struggling overall to create growth and many individual nations in such bad condition they can’t manage without ECB support.
We have seen a lot of forecasters talk about the big Euro recovery but keep in mind, Gross Domestic Product (GDP) is running at 2% in euro zone but in the US it’s well over 6%. We think traders are too bullish on the prospects for euro zone and the Euro…
We showed this chart in a previous post and its worth keeping it in mind going forward. The Fed are probably going to start tapering in the next few months.
Balance of payments data also is bearish for the Euro which we can see on the chart below.
Large speculators still remain bullish on the euro and large speculators hold sizeable net longs position against both the USD and JPY. We expect sentiment to change towards the euro and large speculators to exit longs and go short which will pressure the euro lower. We have had risk on in the markets in recent months but we expect this to turn to risk off which will give both the safe haven USD and JP an additional boost on there safe haven status.
In terms of EUR/USD we have a target longer term of 1.1000 on the monthly chart and 1.1900 is resistance on both the monthly and daily charts. We expect any rallies to fade back to 1.1900 and if we breakout to new daily lows major down trend to unfold.
In terms of EUR/JPY We have targets on the monthly chart of 126.00 then 120.00. On the daily chart we see the EUR as a sell back to resistance or on a break of support.
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