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Euro Forecast: Risks Remain Lower for EUR/USD, Covid Surge Adds to Weakness

Euro Forecast: Risks Remain Lower for EUR/USD, Covid Surge Adds to Weakness

Justin McQueen, Strategist

EUR/USD Analysis and News

  • Risks Remain Lower for EUR/USD
  • Sharp Increase in Covid Cases Adds Another Concern for the Euro

EUR/USD: Fresh 2021 lows for the Euro having posted its lowest close since Summer 2020 and risks continue to be geared towards further downside with a potential move to the low 1.13s. As the threat of inflation continues to build, those central banks who are more able to act will likely see their currency outperform against the Euro, which includes USD and GBP. In turn, with the ECB expected to be the laggard in tightening monetary policy, bond spreads are likely to widen against the Euro and thus pave the way for a weaker currency. The ECB has continued to push back against current market pricing for rate hikes next year and to add to this, with the recent European Commission forecasts showing inflation back below target at 1.4% by 2023, this raises the bar for the ECB to move in a hawkish direction.

Aside from monetary policy, Covid cases are sharply on the rise again in the Euro Area, which has seen the Dutch PM renew social distancing measures, while German state health ministers have urged the parties looking to form a new government to implement stricter Covid measures. As such, with measures to tackle the pandemic likely to weigh on the growth outlook, we can expect the Euro to continue to be on the defensive.

Taking a look at the chart, resistance is situated at 1.1500-1.1520, which could see a reload in fresh EUR/USD shorts. Meanwhile, there is little in the way of notable support until the low 1.13s.

Euro Chart: Daily Time Frame

Euro Forecast: Risks Remain Lower for EUR/USD, Covid Surge Adds to Weakness

Source: Refinitiv

IG Client Sentiment: Euro May Contiue to Fall

Data shows 71.15% of traders are net-long with the ratio of traders long to short at 2.47 to 1. The number of traders net-long is 5.11% higher than yesterday and 24.92% higher from last week, while the number of traders net-short is 10.85% higher than yesterday and 23.09% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall.

Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.

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

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