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Euro Forecast: Prepare for Possible EUR/USD Break to the Downside

Euro Forecast: Prepare for Possible EUR/USD Break to the Downside

Martin Essex, MSTA,

Fundamental Euro Forecast: Bearish

  • The EU looks to be struggling to vaccinate its people against Covid-19, raising fears of another lockdown.
  • Moreover, the yield advantage of US Treasuries over German Bunds continues to rise.
  • Neither of these factors seems to have been fully priced in yet to the EUR/USD pair so a break to the downside is possible once the current period of consolidation ends.
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Euro price outlook poor

EUR/USD has traded for the past couple of weeks between resistance at the 1.20 round number and rising support that can be seen on the chart below. This could well be a continuation pattern suggesting the price will break to the downside and continue the previous falls from the February 25 high at 1.2243.

From a fundamental perspective this would be no surprise given that the EU seems to be behind countries like the US and the UK in vaccinating its people against the coronavirus. That’s caused fears of another lockdown that would damage the prospects of an economic recovery from the slump caused by the Covid-19 pandemic.

EUR/USD Price Chart, Daily Timeframe (December 7, 2020 – March 18, 2021)

EUR/USD Chart

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

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Moreover, the gap between the positive yield on the benchmark US 10-year Treasury note and the negative yield on the 10-year German Bund – the bellwether for the Eurozone – continues to rise, giving investors an increasing incentive to favor the US Dollar over the Euro.

In fact, as the chart below shows, the 10-year Treasury/Bund yield spread has doubled from around 100 basis points (one percentage point) a year ago to two percentage points now.

10-Year US Treasury/German Bund Yield Spread Chart, (April 2019 – March 2021)

Source: Refinitiv

This all suggests that EUR/USD could well drop in due course towards the lows around 1.16 last seen in November 2020. However, the counter argument is that both the slow vaccination program and the yield differential are already in the price and that this, alongside a dovish Federal Reserve, will weaken the US Dollar. In that case, a sustained break above 1.20 could lead to a rally back to the highs around 1.2340 reached in early January.

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Week ahead: PMIs, Ifo and consumer confidence

Turning to the week ahead, there are several potentially market-moving data points on the economic calendar. Among the most important are the purchasing managers’ indexes for the Eurozone and its constituents Wednesday and the German Ifo business climate index Friday. Consumer confidence figures for the Eurozone Wednesday and Germany Thursday could also be important, particularly as the markets are paying more attention to the statistics now than they have been for some time.

Watch out too for a European Council meeting that takes place on Thursday and Friday. EU leaders will meet in Brussels to discuss the response to the pandemic and the region’s economy, among other topics.

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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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