Euro Forecast: Performance after US Elections, COVID-19 Vaccine is a Bad Omen for EUR/JPY, EUR/USD
Euro Forecast Overview:
- The Euro has lagged most of its major peers over the past week, a concerning sign despite jubilance widespread throughout global financial markets.
- EUR/JPY rates appear to be in a more bullish technical setup than EUR/USD rates.
- Per the IG Client Sentiment Index, the Euro has a mixed bias.
Euro Lags Major Peers as Risk Appetite Surges
While the US presidential election results are still not yet fully known, the suspected victory by Democrat Joe Biden has invigorated certain corners of the financial world. In particular, risky assets, including stocks, commodities, and growth-linked currencies have outperformed their peers. The Euro, however, cannot stake claim as a top performer.
In fact, over the past week, the Euro has outperformed only three other major currencies: the US Dollar, the Swiss Franc, and the Japanese Yen. The Euro’s lagging performance alongside the low yielding, safe haven currencies speaks to a host of issues plaguing the Euro right now, including rising COVID-19 caseloads, disappointing economic data, and a discouraging pace of fiscal stimulus.
ECB on Hold, but Watching EUR/USD Rate
While the ECB has no plans to act in the near-term, the US Dollar weakness (vis-à-vis the DXYIndex) since the US election has left ECB policymakers in an uncomfortable position. In September, the ECB’s Governing Council revised their 2019, 2020, and 2021 projections to suggest that they now anticipate euro dollar to trade at 1.18 over the next two years, up from their June forecast of 1.08.
A strong Euro could prove to be a significant impairment to the Eurozone’s recovery from the coronavirus pandemic. To this end, alongside enhanced euro dollar rate forecasts, The ECB has held steady or downgraded their growth and inflation forecasts for 2021 and 2022.
Why Does This Matter for Traders?
The overwhelming narrative right now is that we are in a weak US Dollar environment. However the ECB, fully aware of the fragile recovery that they have on their hands, may not allow the Euro to rally too far lest it become a greater impediment to growth. As the largest component of the DXY Index, if the ECB signals that it is willing to be more aggressive on the easing front, then the US Dollar decline may not be as precipitous as many fear; there could be a ceiling on Euro gains.
EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (November 11, 2020) (CHART 1)
If the ECB does eventually act to cap Euro gains, then it seems less and less likely that the efforts will come vis-à-vis the interest rate channel. Earlier on Wednesday, November 11, ECB President Christine Lagarde said that “while all options are on the table, the pandemic emergency purchase program and targeted longer-term refinancing operations have proven their effectiveness. They are therefore likely to remain the main tools for adjusting our monetary policy.”
Accordingly, expectations for the European Central Bank to cut rates have continued their retreat, which has been gathering pace over the past week. According to Eurozone overnight index swaps, there is an 18% chance of a 10-bps interest rate cut by the end of 2020, down from 25% at the start of November. More starkly, as November began, March 2021 was favored with an implied probability of 59%; now, March 2021 has a 39% chance, and markets are favoring July 2021 with a 52% chance.
EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (January 2018 to November 2020) (CHART 1)
The broader sideways range carved out since late-June remains in place, even as the tighter range dating back to July has seen both support and resistance temporarily broken. EUR/USD rates continue to bound around the downtrend from the 2008 and 2014 highs (from the all-time high). EUR/USD rates are intertwined among below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in neither bearish nor bullish sequential order. Daily MACD is holding at its signal line, while and Slow Stochastics have pulled back prior to reaching overbought territory. Momentum is lacking; the ranges hold.
IG Client Sentiment Index: EUR/USD Rate Forecast (November 11, 2020) (Chart 2)
EUR/USD: Retail trader data shows 29.33% of traders are net-long with the ratio of traders short to long at 2.41 to 1. The number of traders net-long is 13.40% higher than yesterday and 21.92% lower from last week, while the number of traders net-short is 0.56% higher than yesterday and 64.38% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise.
Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.
EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (November 2019 to November 2020) (CHART 3)
The EUR/JPY rate daily chart turned bearish at the start of November upon the break of the rising trendline from the May and September swing lows. But gains over the past week, largely fueled by surging global equity markets and the sell-off among safe havens like the Japanese Yen, has seen EUR/JPY trade back to the May and September trendline.
But the former support has proven formidable resistance, and the daily candlesticks suggest a moderation has onset. Thus, while the momentum indicators have turned quite bullish, they may need to be ‘taken with a grain of salt.’ EUR/JPY rates are above the daily 5-, 8-, 13-, and 21-EMA envelope, which is nearing bullish sequential order. Daily MACD is trending higher below its signal line and Slow Stochastics are nearing overbought condition. More choppy trading may be ahead.
IG Client Sentiment Index: EUR/JPY Rate Forecast (November 11, 2020) (Chart 4)
EUR/JPY: Retail trader data shows 45.87% of traders are net-long with the ratio of traders short to long at 1.18 to 1. The number of traders net-long is 4.40% higher than yesterday and 19.69% lower from last week, while the number of traders net-short is 12.82% higher than yesterday and 22.22% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/JPY prices may continue to rise.
Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/JPY-bullish contrarian trading bias.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.