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Fundamental Euro Forecast: Bullish
- The agreements by EU leaders on a budget and a recovery fund have given EUR/USD a boost and prepared the ground for a further advance that could take the pair back to its autumn 2018 highs.
- However, traders should watch out for a possible retracement first as the pair is now technically overbought.
Euro price outlook still bright
EUR/USD has been given a strong boost by the EU leaders’ agreement on both a long-term budget and a recovery fund to help the bloc recover from the economic damage caused by the coronavirus pandemic. As predicted here a week ago, the Euro has broken above 1.15 and could now challenge the 1.1621 high reached on October 16, 2018 and, ultimately, the 1.1815 high recorded on September 24 that year.
Note, though, that the 14-day relative strength index (RSI) on the chart below is now back above 70, signaling an overbought market, for the third time this year. That means a retracement is likely soon – particularly if the US Dollar’s recent weakness reverses and/or the European Parliament holds up the budget.
You can find out here what overbought and oversold readings mean for forex traders
EUR/USD Price Chart, Daily Timeframe (September 18, 2018 – July 23, 2020)
Chart by IG (You can click on it for a larger image)
One potential trigger for a drop in EUR/USD could be the continuing war of words between the UK and the EU on their relationship post-Brexit, although so far the ebb and flow of the tortuous negotiations has been reflected in GBP/USD rather than EUR/USD.
Week ahead: GDP, Ifo, inflation and unemployment
Turning to the coming week’s economic data, there are several important statistics that Euro traders need to watch carefully. Germany, France and the Eurozone as a whole all publish second-quarter “flash” GDP data and they should be relatively upbeat. Earlier this month IHS Markit, which compiles the monthly purchasing managers’ indexes, reported that the headline Eurozone PMI surged some 17 points in June, a rise beaten over the survey’s 22-year history only by the 18-point gain seen in May.
“The upturn signals a remarkably swift turnaround in the Eurozone economy’s plight amid the Covid-19 pandemic. Having sunk to an unprecedented low in April amid widespread business closures to fight the virus outbreak, the PMI has risen to a level indicative of GDP contracting at a quarterly rate of just 0.2%, suggestive of strong monthly GDP gains in both May and June,” IHS Markit said.
Inflation and unemployment figures are also due but these are less likely to have an impact on EUR/USD than Monday’s Ifo index of German business morale at the start of the third quarter this month.
--- Written by Martin Essex, Analyst and Editor
Feel free to contact me via Twitter @MartinSEssex
