FUNDAMENTAL EURO FORECAST: BEARISH
The EU seems to be trying hard to vaccinate its individuals from Covid-19, raising fears of another lockdown.
In Addition, the yield benefit of US Treasuries over German Bunds continues to grow.
Neither of those factors appears to have been completely priced in yet to the EUR/USD set therefore a break to the disadvantage is potential when the present phase of consolidation finishes.
EUR/USD has exchanged for the last few weeks involving immunity in the 1.20 round amount and increasing support which may be observed on the graph below. This may be a continuation pattern indicating the cost will fall into the downside and keep the prior drops out of the February 25 high in 1.2243.
From a fundamental perspective this could not be any surprise since the EU appears to be behind nations such as the US and the UK in vaccinating its individuals against the coronavirus. That is caused fears of a different lockdown that could harm the prospects of an economic recovery from the downturn brought on by the Covid-19 pandemic.
In addition, the gap between the optimistic return on the standard US 10-year Treasury note along with the adverse yield on the 10-year German Bund — the bellwether for the Eurozone — continues to increase, providing investors a growing incentive to prefer the US Dollar within the Euro.
In reality, as the graph below reveals, the 10-year Treasury/Bund return spread has dropped from approximately 100 basis points (one percent point) a year ago to 2 percentage points today.
This suggests that EUR/USD could drop in due course towards the highs around 1.16 last observed in November 2020. However, the counter argument is that the slow vaccination program as well as the return differential are already in the cost and this, along with a dovish Federal Reserve, will weaken the US Dollar. If that’s the circumstance, a sustained break above 1.20 can result in some rally back into the highs across 1.2340 attained in early January.
Turning into the week ahead, there are some possibly market-moving data points around the economic calendar. One of the most significant will be the purchasing managers’ indicators for the Eurozone and its components Wednesday along with the German Ifo business climate indicator Friday. Consumer confidence figures for the Eurozone Wednesday and Germany Thursday could also be significant, especially as the niches are paying more attention to the numbers now than they’ve been for some time.
Watch out also for a European Council meeting that Occurs on Thursday and Friday. EU leaders will meet in Brussels to go over the answer to the pandemic as well as the area’s market, among other subjects.
