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Euro Weekly Forecast: ECB Stimulus Primed and Ready as Outlook Sours

Euro Weekly Forecast: ECB Stimulus Primed and Ready as Outlook Sours

2019-07-28 02:00:00
Nick Cawley, Strategist

Euro Price Fundamental Forecast: Bearish

Q3 2019 Euro Forecast and Top Trading Opportunities

Euro Upside Capped as ECB Prepares to Stoke the Ailing Euro-Zone Economy

The fundamental outlook for the Euro is negative and is likely to remain that way in the weeks to

come after ECB President Mario Draghi signaled on Thursday that the central bank was ready to cut interest rates even further into negative territory and re-start the recently finished bond buying program (QE). In the press conference after the ECB monetary policy meeting, President Draghi highlighted that the outlook for the EZ manufacturing sector is ‘getting worse and worse’ and that the ECB would embark on a range of highly accommodative measures to boost growth and stubbornly low inflation.

These comments mirror recent data released in the Euro-Zone which saw manufacturing sentiment in Germany – the single blocks historical economic powerhouse - at multi-year lows. Inflation also remains lowly and Draghi, who leaves the ECB at the end of October, has decided to ready the market for another liquidity flush at the September ECB meeting, when the central bank’s staff projections for inflation and growth will also be released. The deposit rate is likely to pushed even further into negative territory from its current rate of -0.40%, while the bond buying program will likely be re-started in a further effort to kick-start growth and inflation. The German bond curve – the de-facto ECB benchmark – is currently trading with negative yields all the way out to 20-years, while the German 30-year long-bond offers a paltry 22 basis points of yield.

German Bond Yields

Against this background it will be very difficult for the Euro to push higher from its current levels, although EURUSD may get a small boost on Wednesday next week when the Fed starts cutting interest rates, with a 0.25% cut fully expected and a 0.50% cut a possibility. EURUSD has already probed the 27-month low at 1.1107 and is expected to re-test this level in the near-term, unless the Fed surprises and cuts interest rates by 0.50%. A move to EURUSD 1.1000 cannot be discounted in the short-term.

EURUSD Price Daily Chart (December 2018 – July 26, 2019)

EURUSD Price Chart

Professional speculators remain short of the Euro, especially leveraged funds, while non-commercial funds have reduced their short positions in the last 3-4 months.

Euro Market Positioning

The IG Client Sentiment Indicator shows EURUSD traders are 74.3% net-long with the ratio of traders long to short at 2.89 to 1. We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggest EURUSD may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURUSD bearish contrarian trading bias.

Traders may be interested in two of our trading guides – Traits of Successful Traders and Top Trading Lessons – while technical analysts are likely to be interested in our latest Elliott Wave Guide.

What is your view on EURUSD – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author at nicholas.cawley@ig.comor via Twitter @nickcawley1.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.