Currency Pair of the Week: EUR/USD.
EUR/USD is at a key inflection point in terms of direction.
The ECB left rates unchanged last week at -0.5% as Christine Lagarde noted that risks were
still tilted to the downside due to the slow vaccine rollout, however those downside risks are less pronounced. She also noted that the ECB was ready to adjust any of its instruments as needed to ensure that inflation moves towards the ECB’s target of 2%. This comes on the heels of lockdowns and restrictions in Europe because of the coronavirus, including countries such as Germany, Spain, and Portugal. France is considering a new lockdown of its own within days. With economic data already weak, these lockdowns will continue to hurt the European economy, especially in the service sector. This means continues fiscal and monetary stimulus. At the December meeting, the ECB extended PEPP through March 2022 and added 500 billion euros to the program. Germany’s Ifo disappointing to the downside on Monday to its lowest level since July 2020. The focus will turn to inflation and unemployment data from Germany later this week. In addition, markets will be watching for headlines related to new restrictions and lockdowns, as well as, vaccine rollout related news.
This week begins President Biden’s first full week in office. Even before he took office, President Biden proposed a $1.9 trillion economic stimulus program, which includes up to $1,200 in direct aid to individuals in need from the pandemic. This plan was fully supported by soon to be confirmed Treasury Secretary Janet Yellen, who noted in her confirmation
hearing that now is the time to help the economy recover, not raise taxes. In addition, the vaccine rollout in the US has been remarkedly slow. Biden has vowed to vaccinate 1,000,00 people in 100 days. Markets will be watching to see how fast and how well Joe Biden is able to get his agenda implemented. In addition, the FOMC meets on Wednesday this week. As with the ECB, expectations are for unchanged, given the Presidents fiscal stimulus package and the exceptional stimulus the Federal Reserve has already provided. The FOMC will most likely be in “wait and see” mode. Fed Chairman Powell’s comments afterwards will be watched closely for hints regarding inflation and inflation expectations, as well as his outlook to growth. US data has been poor as of late, including employment data and retail sales. This week the economic focus will be on Advanced Q4 GDP and well as the core PCE, which the Fed uses as a gauge for inflation.
Technically, on January 8th, EUR/USD broke lower from an ascending wedge that began in
mid-October 2020. The pair retraced to
horizontal support and the 38.2% Fibonacci extension from the low on November
4th, 2020 to the high on January 6th, near 1.2062. In addition, EUR/USD broke out of a flag formation (red), which targets all the way up near 1.2800. However, based on the angle of the flagpole, which is used as a target for a flag pattern after the breakout, it suggests it
may take a few months to get there (remember, price rarely moves in a straight
line).On a shorter-term 240-minute timeframe, EUR/USD has put in a shorter
ascending wedge of its own, which began on December 9th, 2020. Price broke lower and retraced a full 100% of the wedge to its target near 1.2050 on January 18th. Since then, price moved higher to near the 50% retracement level from the highs of January 6th to the lows of January 18th, just below 1.2200. The daily timeframe suggests higher (flag formation), however, if price falls below 1.2050, it would suggest a move back to the bottom of the ascending wedge on the daily timeframe, near 1.1605. First support is the 1.2105, followed by the 1.2050 lows and previous resistance near 1.2010. Resistance comes in near 1.2200 prior highs near 1.2222, and the January 6th highs near 1.2350.
EUR/USD is at a key inflection point in terms of direction.
Price action this week will depend on the FOMC and vaccine rollout across both Europe and the US. Any hawkish signs from the Fed could signal a longer term move lower, while unresolved issues with the vaccine rollout could send it higher. Euro got away with a black eye.
Forecast as of 03 Feb 2021
Forecasts are good for breakfast but bad for dinner. Gloomy outlook suggested for the euro
area and the euro may eventually play into the hands of EURUSD bulls. Let us discuss the Forex outlook and make up a trading plan.
Weekly euro fundamental forecast
Central banks’ presidents, current or former, are essential players in the game of world politics. For instance, Janet Yellen is appointed as US Treasury secretary. Or Italy’s head of state, President Sergio Mattarella, asks Mario Draghi to settle down the country’s political crisis. President Mattarella invited Draghi after Italy’s left-leaning coalition government broke down and couldn’t put back together again. Mario Draghi saved the euro, but can he save Rome?
All of Europe has a stake in Italy’s economic fortunes, given its teetering national debt and its electorate’s mixed feelings lately about the European Union and the euro.
Germany and other EU members agreed to support a massive European recovery fund largely to prevent Italy from sliding into a deep crisis. Italy’s economy contracted by nearly 9% in 2020, which is one of the deepest recessions in the eurozone.
If we look at the economic state, the situation for the EURUSD bulls is close to despair. In 2020, the euro-area GDP contracted by 6.8%, which is much worse than a 3.5% decline in the USA. By contrast, China’s economy expanded by 2.3%. The IMF expects that the euro-area economy in 2021 will be 3.3% less than in late 2019. The US GDP, on the contrary, will be 1.5% up. Based on the current vaccination rate, the UK will inoculate 60% of the population by June, the USA – by October, France and Italy – by summer 2022, Germany and Italy – by 2023.
After all, forecasts are good for breakfast but bad for dinner. Reuters experts expected the euro-area economy to contract by 1.2% in the fourth quarter (ECB suggested a 2.2% decline), but the GDP was just 0.7% down. Germany and Spain surprised by the GDP growth, and Bloomberg analysts say that the eurozone recession in the first quarter won’t be as severe as it was earlier expected (4%). The eurozone economy adjusts to pandemic and lockdowns, the GDP downturn is not as deep as it was in April-June (11.7%), so the euro-area economy got away with a black eye.
History knows many examples when pessimistic forecasts, in fact, supported the currency. For
instance, at the end of 2016, few believed that the eurozone would outpace the United States in terms of economic growth the next year, and it did so in 2017, which led to a 14% rise in EURUSD. Let’s not forget that the euro-area and China’s economies are related: the better is China’s economic performance, the better is for the export-led eurozone and the euro. German Chancellor Angela Merkel promised to vaccinate every German by the end of summer, which should encourage the euro buyers.
Weekly EURUSD trading plan
I do not recommend catching falling daggers. The excessive market pessimism suggests
that the euro is undervalued, and the bulls can still restore the uptrend. One could consider buy trades if the EURUSD goes up above 1.208. Level 1.195 may not stop the bears. Meanwhile, hold down the short trades entered in late January but be ready to turn up at any moment.
EURUSD current rate in the Forex market
EURUSD = 1.20281
EUR is showing ambiguous trading dynamics against USD during today’s Asian session, consolidating after a two-day downside rally that has led to renewed local lows for the instrument since December 1. The pressure on EUR is increasing as quarantine restrictions persist in many European countries, as well as amid the ambiguous prospects for economic recovery in the region in early 2021. Meanwhile, the macroeconomic data from Europe published on Tuesday managed to help the “bulls” a little. Eurozone GDP in Q4 2020 decreased by 0.7% QoQ after growing by 12.5% QoQ last month. Analysts expected a decrease of 1.2% QoQ. In annual terms, the economic decline accelerated from –4.3% YoY to –5.1% YoY, which again turned out to be better than the market forecasts at the level of –5.4% YoY. Today, investors are focused on the European statistics on business activity and consumer price levels for January.
GBP is showing multidirectional dynamics in pairing with USD in trading this morning session,
consolidating near 1.3660. Noticeable pressure on GBP is exerted by rather strong positions on USD, which is strengthening as the negotiation process develops around a new stimulus package for the American economy in the amount of USD 1.9 trillion. The day before, US President Joe Biden said he would continue to defend the original plan, despite criticism from Republicans, who consider the new stimulus package too expensive. The macroeconomic statistics from the UK published on Tuesday were disappointing. Nationwide Housing Prices
Index in January showed a decrease of 0.3% MoM after an increase by 0.9% MoM in the previous month. Analysts had expected positive dynamics to remain at +0.3% MoM.
NZD is significantly strengthening against USD in trading this morning session, testing the level of 0.7220 for a breakout. Significant support for the instrument is provided by strong macroeconomic statistics on the labor market in New Zealand, released this morning. The Unemployment Rate in the country in Q4 2020 fell sharply from 5.3% to 4.9%, while the forecasts assumed its further growth to 5.6%. Employment Change for the same period rose 0.6% after falling 0.8% over the previous period and a zero forecast by analysts. At the same
time, the Labor Cost Index in Q4 showed only moderate growth of 0.5% QoQ and 1.5% YoY after growing by 0.4% QoQ and 1.6% YoY in the previous quarter.
USD maintains an uptrend in trading against JPY, updating local highs from November 12, 2020. Now USD has added about 0.04% and is testing strong resistance at thepsychological level of 105.00. It is supported by the prospects for the early approval of a new stimulus package for the national economy in the amount of USD 1.9 trillion, which is likely to help the country recover to pre-crisis levels as early as 2021 (if the epidemiological situation in the country and the world does not begin to deteriorate again). Macroeconomic statistics from Japan released on Wednesday puts moderate pressure on JPY. Jibun Bank Services PMI for January fell from 47.7 to 46.1 points, which was worse than average forecasts.
Gold prices are showing moderate gains during today’s Asian session, correcting after a strong decline the day before, which was triggered by some progress in negotiations on a new stimulus package for the US economy. In addition, USD was supported by a decrease in demand for safe assets in response to an improvement in the dynamics of the incidence of coronavirus in the world. Today, investors will be focused on macroeconomic statistics from the US on the levels of business activity from Markit and ISM in January. In addition, much attention will be paid to the publication of the January ADP Employment Change report, which will precede Friday’s data on the US labor market. Forecasts suggest that the ADP report will reflect an increase in private sector employment of 45K new jobs after a decline of 123K in the previous month.