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Euro Forecast: EUR/USD Outlook Bearish as Second Wave of Covid-19 Hits Europe

Euro Forecast: EUR/USD Outlook Bearish as Second Wave of Covid-19 Hits Europe

2020-10-18 04:00:00
Martin Essex, MSTA, Analyst
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EURUSD Price Chart

Chart created with TradingView

Fundamental Euro Forecast: Bearish

  • Countries across Europe are reporting a resurgence in Covid-19 infections after a brief lull, although that could be due simply to increased testing.
  • If confirmed, the European economy may not outperform the US in the way previously expected, and that could damage EUR/USD, particularly if pessimism about the EU economy prompts professional traders to reduce their long positions further.
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Euro price at risk of setback

A second wave of the Covid-19 pandemic appears to be hitting Europe, forcing investors to rethink the narrative that the European economy will suffer less damage from the virus than the US economy. While the latest rise in infection numbers could be due simply to increased testing, the fear is that it will prompt further damaging lockdowns.

That is a clear negative for EUR/USD and could be magnified if more investors decide to respond by reducing further their long positions in the pair. As the chart below shows, professionals have been long EUR/USD since March but have been reducing their long positions in recent weeks.

EURUSD Chart

Source: CFTC CoT Report(You can click on it for a larger image)

If that trend persists, EUR/USD could well dip to the lows at 1.1611 and 1.1613 recorded on September 25 and September 28, and perhaps just below there to 1.16 or 1.1596, where the 100-day moving average checks in.

EUR/USD Price Chart, Daily Timeframe (July 15 – October 15, 2020)

EURUSD Price Chart

Source: Refinitiv (You can click on it for a larger image)

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Confidence data on the agenda

The full impact on the Eurozone economy of the Covid-19 pandemic in the three months July-September will not be known until October 30, when “flash” preliminary third-quarter GDP data are released. This coming week, however, is an important one for confidence indicators suggesting the extent to which sentiment has been damaged by the prospect of a second wave.

German and Eurozone consumer confidence numbers, and French business confidence data, are all released Thursday. The next day they will be followed by flash October purchasing managers’ indexes, and any signs of worse-than-expected weakness could make the outlook for EUR/USD even more bearish.

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--- Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex

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

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