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Euro Forecast: EUR/USD Rally Fading, Will European PMIs Rekindle Bulls?

Euro Forecast: EUR/USD Rally Fading, Will European PMIs Rekindle Bulls?

2020-08-21 22:00:00
Daniel Dubrovsky, Analyst
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Euro Fundamental Forecast: Neutral

  • Euro has been broadly unchanged against its major peers
  • Post-EU Summit rally has fizzled as focus shift to the ECB
  • Rosy EU PMIs may boost Euro, follow-through not a given

At first glance, it appears that the Euro has been enjoying strong gains as of late. A closer look reveals that a disproportionate amount of its strength seems to be expressed against the US Dollar. Since late March, EUR/USD has climbed about 6.5%. Meanwhile my majors-based Euro index has climbed 0.2% over the same period, see chart below. The latter averages EUR against USD, JPY, GBP and AUD.

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Where the Euro is struggling is against the growth-linked Australian Dollar. This is understandable given the recovery in global market sentiment since late March. This has consequentially dented anti-risk currencies like the US Dollar and Japanese Yen. In fact, the performance in EUR/JPY this year is comparable to EUR/USD. Recently, the last bit of strength in the Euro occurred after the EU Summit deal on July 21.

This opened the door to a EUR750 billion agreement working in tandem with aggressive easing measures from the European Central Bank (ECB). These boosted economic optimism and paved a path for greater European integration. Since then however, the Euro has broadly remained in a neutral setting. The focus may be shifting to next month’s ECB interest rate announcement.

This past week, the minutes of the ECB’s July meeting highlighted that policymakers expect more clarity about the inflation outlook in September. Until then, the central bank could wait until fresh staff projections to decide on the path forward for unconventional measures. Meanwhile, spiking coronavirus cases in Germany have resulted in leaders ruling out a further easing in lockdown measures.

With that in mind, the Euro’s path may remain fairly neutral. The most volatility could come against USD, JPY and AUD as they interact with global equity markets. Lately, economists have been tending to underestimate the health and vigor of the regional bloc. Perhaps rosy Markit PMIs out of France, Germany and the Eurozone could boost the Euro. Follow-through may have to wait until the ECB chooses its next path.

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Euro Strength or US Dollar Weakness?

EURO Chart

Chart Created in TradingView

*Majors-Based Euro Index Averages EUR Against: USD, JPY, GBP and AUD

--- Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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

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