Analysis | June 11, 2021

Outlook and forecast: EUR/USD

We had the ECB yesterday but reaction in EUR/USD was muted and volatility has dropped in the pair – the euro is now trading sideways after a big move to the upside in recent months so will we see continuation of the uptrend or a break lower?

We had the ECB Yesterday: “European Central Bank President Christine Lagarde renewed a pledge to deliver faster bond buying even as officials acknowledged for the first time since 2018 that the euro-zone economy is no longer overshadowed by risks to its growth outlook.” (Bloomberg)

In terms of Christine Lagarde the ECB president justified more bond-buying because: “A sustained rise in market rates could translate into a tightening of wider financing conditions,” she noted they would be “significantly higher” and justified this by saying “Such a tightening would be premature and would pose a risk to the ongoing economic recovery.”

Purchases have been conducted at a rate of roughly 19 billion euros a week since March, up from 14 billion euros earlier in the year. Today’s decision indicates they will be kept at 19 billion or more and we wouldn’t be surprised to see an increase.

Stimulus is needed to keep many of the poorer nations such as Italy where the central bank at present is buying ALL government debt. It cannot be reduced in the near future in our view and will probably be increased.

Lagarde and the ECB gave forecasts that showed faster growth and inflation both this year and next, she insisted that price pressures in the economy “remain subdued.” In terms of increased stimulus this is bearish.

This view is from Danske Bank: “In line with our expectation, ECB optimism came through in forecasts on growth and inflation. As often has been the case, such optimism is mildly positive. Overall, though, the short-term outlook will likely continue to be that spot remains in the recent range of 1.20-1.24 and measures of volatility are also coming lower too. The next focus for spot will turn to FOMC and PMIs which do have the scope to take spot to end-point of these intervals (in both directions). Looking ahead, we continue to expect EUR/USD to move towards 1.15 in 12m.” (DANSKE BANK)

We are more bearish than the above view longer term but in the short term we think the euro has limited upside and is unlikely to take out 1.2300 and will probably fall back to 1.18 If we look at ECB Stimulus its bearish for the Euro – it’s being increased and compared to the Fed, the ECB are now doing far more relative to GDP:

The market is optimistic about a Euro zone recovery, but the chart below shows the only buyer of Italy’s debt is the Central bank! Stimulus will need to be increased in the coming months to keep the poorer nations such as Italy – the fact is the poorer nations cannot take higher borrowing costs due to severe debt problems.

The market is optimistic about a Euro zone recovery, but the chart below shows the only buyer of Italy’s debt is the Central bank! Stimulus will need to be increased in the coming months to keep the poorer nations such as Italy – the fact is the poorer nations cannot take higher borrowing costs due to severe debt problems.

Technical Analysis

We have choppy price action and volatility has dropped – we think the up move is exhausted and view the EUR as a sell on rallies – If we rally above 1.2200 we would look to sell back through the round number with a stop behind 1.2300 or sell a break of support with stop behind recent highs- targets in terms of both scenarios 1.200 then 1.1800.

 

Research provided by LearnCurrencyTradingOnline.com

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