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Euro Forecast: Decision on Coronabonds Critical For EUR/USD Outlook

Euro Forecast: Decision on Coronabonds Critical For EUR/USD Outlook

Martin Essex, MSTA, Analyst
EURUSD 2-Hour Chart

Source: IG Charts

Fundamental Euro Forecast: Neutral

  • Several EU countries hardest hit by Covid-19, including France, Italy and Spain, are calling for the issue of debt guaranteed by the Eurozone nations as a whole to raise funds to tackle the economic impact of the coronavirus pandemic.
  • More fiscally-conservative nations, including Germany and the Netherlands, oppose the launch of these so-called coronabonds.
  • The decision, which could come as soon as this week, will be a major factor determining whether the Euro strengthens or weakens in the weeks ahead.

Euro price may depend on coronabond decision

A crucial decision by the Eurozone nations on whether to issue debt guaranteed by all of them collectively and individually is coming closer – and the outcome of the discussions will likely determine the future strength or weakness of the Euro over the coming weeks.

The plan is backed by countries including France, Italy and Spain, which have been hard-hit by the coronavirus pandemic as it would likely lower the cost of their borrowing to raise funds to tackle its likely economic impact. However, the more fiscally-conservative Eurozone countries, including Germany and the Netherlands, are opposing the idea both for ideological reasons and because it would increase their funding costs, albeit probably only marginally.

An agreement on the issue of debt to help fund efforts to prevent the spread of Covid-19 having a devastating economic impact on the Eurozone – inevitably dubbed “coronabonds” – would likely strengthen the Euro while the plan’s rejection would likely weaken it, at least in the longer term, and add to the recent downward pressure on the common currency.

EUR/USD Price Chart, Daily Timeframe (January 2 – April 2, 2020)

EURUSD Price Chart

Chart by IG (You can click on it for a larger image)

As the chart above shows, the past week saw a quite dramatic slide in EUR/USD, with the Euro seen increasingly as a “risk-on” asset like stocks, the Canadian Dollar, the British Pound and the Australian Dollar that suffer most when money flows into cash and haven assets such as the US Dollar and US Treasuries at times when market confidence is ebbing away.

Technically, therefore, EUR/USD might be expected to weaken further now it is in an established downtrend. However, retail traders were not just short the pair last week – having sold it in the hope of buying back later at a lower price – but were increasing their short positions. If you take a contrarian view of retail trader positioning, as we do at DailyFX, that would suggest a rally is now due.

EUR/USD BULLISH
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -12% 6% -2%
Weekly -16% 3% -5%
What does it mean for price action?
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Overall, therefore, EUR/USD will likely trade sideways until the decision on coronabonds unless there is another big shift in sentiment towards or away from safe havens. With the US Dollar seen increasingly as the ultimate haven – rather than gold, the Japanese Yen or the Swiss Franc – EUR/USD would likely be impacted more than most other assets by such a shift in sentiment, particularly as it remains the world’s most traded currency pair.

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Note incidentally that no high-impact economic data are scheduled for the Eurozone in the week ahead, although German factory orders on Monday and industrial production on Tuesday are worth watching out for even though the figures are for February and therefore of limited relevance.

Note too that the European Central Bank has announced that its strategic monetary policy review – its first since 2003 – has been postponed for six months because of the coronavirus pandemic. The conclusion of the strategy review will thereforelikely be published in mid-2021 rather thanat the end of 2020.

What are Safe-Haven Assets & How to Trade Them

--- Written by Martin Essex, Analyst and Editor

Feel free to contact me via the comments section below

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

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