Fundamental Euro Forecast: Neutral
- EUR/USD rose strongly last week and its upward momentum suggests further gains from a technical perspective.
- That seems likely to offset what could be a difficult week fundamentally as the EU and the UK begin negotiations on their future relationship after Brexit.
- Eurozone inflation and unemployment data are on the calendar, followed by German factory orders.
Euro trend higher remains in place
Nobody ever said the markets are always logical. As risk-off sentiment gripped investors last week, the Euro might have been expected to fall sharply as they abandoned riskier assets like stocks in favor of safe havens like US Treasuries and gold. Instead, the Euro rose sharply for no apparent reason other than a slide in the US Dollar as Treasury yields dropped.
From a technical viewpoint, EUR/USD is therefore trending higher and its upward momentum remains in place for now, potentially offsetting a bleak outlook from a fundamental perspective.
EURUSD Price Chart, Daily Timeframe (December 23, 2019 – February 28, 2020)
Chart by IG
| Change in | Longs | Shorts | OI |
| Daily | 3% | 5% | 3% |
| Weekly | -8% | 5% | -4% |
Italy, the third-largest Eurozone economy after Germany and France, was hit hard by the spread of the coronavirus outbreak that was largely responsible for the tumble in world stock markets. Moreover, dovish comments from members of the European Central Bank’s rate-setting Governing Council began to emerge.
Among them, Vitas Vasiliauskas said the ECB could call an emergency meeting on Covid-19. At this point, the ECB has a “wait and see approach”, he said. But “there is no problem for the Governing Council to meet in some extraordinary way, not to wait until the next monetary policy meeting.”
This was largely offset by a comment from German Finance Minister Olaf Scholzthat he is considering limited fiscal stimulusand one from ECB President Christine Lagarde that she sees no need for imminent monetary stimulus.
However, the outlook for the negotiations between the EU and the UK on their post-Brexit relationship that begin on Monday look fraught with difficulties. Both sides continue to take very hard lines, with UK Prime Minister Boris Johnson threatening that the UK would walk away from the talks if negotiations have failed to progress by June, focusing instead on preparations for a hard exit on World Trade Organization terms at the end of the year. So far, this has only hit the British Pound but it is also potentially negative for the Euro.
Week ahead: Eurozone CPI and Jobs, German factory orders
Turning to the economic calendar, there are several important data points in the week ahead that could influence EUR/USD one way or the other. Figures on Eurozone inflation in February and unemployment in January are both due Tuesday, and if the CPI measure of inflation falls to 1.2% year/year from 1.4% as analysts are expecting that could strengthen the case for even easier Eurozone monetary policy.
German factory orders figures, due Friday, could also knock the Euro back if they show another steep fall, emphasizing the current weakness of the German economy’s industrial sector.
--- Written by Martin Essex, Analyst and Editor
Feel free to contact me via the comments section below or on Twitter @MartinSEssex
