Fundamental Forecast as of 26 Jan 2021
Euro has a bad feeling. The slow introduction of vaccines sets the EURUSD bulls back. There should start a correction down. Should the euro bulls step back? Or is it a chance to buy the single European currency at a low price? Let us discuss the Forex outlook and make up a trading plan.
Weekly euro fundamental forecast
If greed rules the market, the currency traders follow their doubts. The EURUSD doesn’t rise even amid the S&P 500 rally and the drop in the US Treasury yields. The future doesn’t look as bright as it did in November-December. The pharmaceutical giant Merck’s refusal to develop its own vaccine and the statement by AstraZeneca that shipments to the EU will lag behind forecasts press down the euro.
Netherlands Bureau for Economic Policy Analysis reports that, at the end of 2020, the volume of international trade for the first time in several months exceeded the levels that took place a year earlier (+ 1.5%), which proves my Forex analysis to be correct. In November-December, the EURUSD was growing amid the optimism about a soon victory over the COVID-19, opening of the economies, and rebound of the global GDP and international trade. The main driver of the international trade growth in early December was industrial production, which was only 1.6% lower than at the end of 2019 in the euro area (5.4% lower in the US)
In January, it became clear that the vaccination is not as fast as expected, the euro-area countries extend lockdowns, and the GDP is not going to rebound. The Bloomberg leading indicators suggest that the economic activity is slowing down. The manufacturing PMI is the only indicator that should be up, but weak demand overloads the warehouses. It is not surprising that international trade is not growing.
Therefore, the investing ideas of November-December do not work. The euro doesn’t grow, although the US stock indexes soar (investors even joke that a bear is not the one who sells the equities, but the one who has less than 75% of stocks in the portfolio). The drop in the US Treasury yields, which should potentially weaken the dollar, doesn’t support the euro. Investors buy the US government bonds as they doubt the approval of the $1.9 trillion fiscal stimulus package by Congress and the rebound of the US economy. Besides, low TIPS rates and growing inflation expectations create a favorable environment for tech stocks, which is proven by history.
The only thing that holds back the EURUSD bears now is the potential dovish tone of the Fed. Jerome Powell is likely to refute the statements of individual FOMC members about the future tapering of QE. No one wants the taper tantrum of 2013 to repeat.
Weekly EURUSD trading plan
I still believe that the euro will reach $1.25. Humanity will defeat the pandemic, and the November plans will certainly come true. A little later. Meanwhile, Jerome Powell’s comments at the press conference following the FOMC January meeting could send the EURUSD down below the key support at 1.208-1.2085, starting a correction.
Market Review on 26 Jan 2021
EUR is slightly declining against USD during today’s Asian session, developing the corrective impulse formed the day before. Market sentiment remains quite unsettled, given the negative macroeconomic background in Europe. The authorities of France, where the curfew is currently maintained, are considering the possibility of introducing additional quarantine restrictions in an attempt to curb the increase in the incidence of COVID-19. Additionally, EUR is under pressure from Monday’s statistics from Germany. The IFO Business Climate in January fell from 92.2 to 90.1 points against the forecast of a fall to 91.8 points. The IFO Expectations index for the same period corrected from 93 to 91.1 points, contrary to the expected growth to 93.2 points.
GBP declines against USD in today’s Asian session, testing the level of 1.3650 for a breakdown. The pressure on the position of the instrument remains against the background of a difficult epidemiological situation in the country, which has not yet been stabilized by the vaccination campaign. Against this background, investors are discussing possible actions by the Bank of England, aimed at further supporting the national economy. Negative rates are also discussed, but analysts agree that this will be one of the “extreme” measures and nothing of the kind should be expected in the near future. On Tuesday, traders are focused on the UK labor market report for November and December. It is expected that the country’s unemployment rate will continue to rise, which may be partially offset by an increase in average earnings.
NZD has returned to decline against USD during today’s Asian session, offsetting moderate gains on Monday, when the market was dominated by corrective sentiment. Investors are quite optimistic about the statistics on morbidity in the United States, where there have been stable positive trends for the first time in a long period. It is expected that the state of California will soon be able to lift the self-isolation order, allowing the business to return to work. In general, the situation with the coronavirus remains very difficult, especially given the current state of affairs in Europe. The volumes of vaccination of the population are still too small to significantly affect the statistics; however, there are certain reasons for optimism here too. Macroeconomic data from New Zealand provided some support to the instrument on Tuesday. Business NZ PSI in December rose from 46.7 to 49.2 points, almost reaching the psychological level of 50 points.
USD demonstrates a slight increase paired with JPY, maintaining a weak upward momentum, formed at the end of the last trading week. Some support for the instrument is provided by the improvement of the epidemiological background in the United States, which, possibly, will allow adjusting the policy of restrictive measures towards mitigation in the near future. In addition, investors are noticeably encouraged by the prospect of the presidency of Joe Biden, who has already signed a number of important bills, and also announced a new package of measures to support the national economy in the amount of USD 1.9 trillion. Macroeconomic statistics from Japan provided minor support to JPY today. Corporate Service Price Index in December fell by 0.4% , after falling by 0.6% YoY. Analysts had expected decline by 1.3%
Gold prices are showing flat dynamics in trading today, consolidating near 1855.00. The instrument demonstrated an attempt to decrease the day before, responding to a short-term strengthening of the positions of USD. Additional pressure on gold’s position was exerted by statistics on the incidence of COVID-19 in the United States, which for the first time in a long period shows a steady decline. However, closer to the end of the afternoon session, the asset managed to win back the lost positions, strengthening in anticipation of the Fed meeting on Wednesday.
In addition, gold is supported by the expectation of the introduction of new stimulus measures for the US economy in the amount of USD 1.9 trillion, which was previously announced by US President Joe Biden.
Global Fundamental Analysis 26 Jan 2021
Opening Call: The Australian share market is to open higher.
The S&P 500 and Nasdaq eked out record closes in choppy trading. The Dow industrials were slightly lower. The 10-year Treasury yield has its largest one-day decline since November, losing 0.052 percentage point to 1.03%. The WSJ Dollar Index was up 0.12% to 85.32. Crude oil prices got a boost from risks to global supplies. Gold prices fell for a third session ahead of this week’s Federal Reserve meeting.
Australia’s S&P/ASX 200 index closed 0.4% higher, aided by gains in materials, consumer and healthcare stocks.
The Nasdaq Composite climbed to a closing record amid sharp volatility in technology stocks and a big week for corporate earnings.
The Nasdaq finished higher by 0.7%. The tech-heavy index jumped as much as 1.4% after the opening bell, and then turned negative and tumbled to a 1.3% loss before rebounding. The Dow Jones Industrial Average dropped 0.1%, while the S&P 500 added 0.4% to close at a record.
A raft of corporate earnings reports in the coming days is expected to show which corporations are thriving and which are struggling amid the Covid-19 pandemic.
Gold futures ended lower, down a third straight session, as government bond yields pulled back and the U.S. dollar strengthened, ahead of a Federal Reserve meeting on monetary policy later this week.
February gold fell $1, or nearly 0.1%, to settle at $1,855.20 an ounce, off the session’s low of $1,846.20.
Oil futures declined for the session, pulling U.S. prices lower for the week after U.S. government data revealed an unexpected weekly rise in domestic crude supplies. A resurgence of Covid-19 infections in China and Southeast Asia also raised concerns about near-term oil demand.
West Texas Intermediate crude for March delivery fell by 1.6% to settle at $52.27 a barrel on the New York Mercantile Exchange, with the contract down about 0.3% for the
Global benchmark March Brent crude fell 1.2% at $55.41 a barrel on ICE Futures Europe, with prices holding on to a gain of around 0.6% for the week, according to Dow Jones Market Data.
The Japanese Nikkei ended 0.7% higher, supported by pharmaceutical and utilities stocks. Coronavirus-related developments remain closely watched after local media reports said a surge in cases left at least 15,000 on waiting lists for hospitals or other accommodations.
China’s major stock benchmarks ended the session broadly higher. The Shanghai Composite Index gained 0.5% and the Shenzhen Composite Index added 0.3% while the ChiNext Price Index slipped 0.1%.