Fundamental Euro Forecast: Bearish
- US GDP growth this year will likely outstrip economic growth in the Eurozone, and the Federal Reserve will therefore likely tighten monetary policy well before the ECB.
- That will continue to put downward pressure on EUR/USD long-term, taking it to new 2021 lows once the critical support level at 1.17 has been taken out.
Euro prices at risk of steep falls
GDP growth in the US and the UK this year will likely be significantly higher than in the Eurozone and that does not yet seem to be priced in fully to the EUR/USD or EUR/GBP exchange rates, suggesting further weakness in both pairs. According to the International Monetary Fund, economic growth in both the US and the UK could reach 7% this year – the highest figure among the major advanced economies – compared with a relatively modest 4.6% in the Eurozone.
This is one of the reasons why both the US Federal Reserve and the Bank of England are expected to tighten monetary policy before the European Central Bank. Indeed, the Fed could outline its plans as soon as this year’s Economic Policy Symposium in Jackson Hole,Wyoming from August 26-28 while the ECB remains persistently dovish.
Is this in FX prices already? Some of it certainly is, but with the 10-year US Treasury note yielding a full 1.8 percentage points more than the 10-year German Bund – and with the gap likely to rise as Fed tightening draws nearer – it is hard to see anywhere for EUR/GBP and EUR/USD to go but down.
EUR/USD Price Chart, Daily Timeframe (October 21, 2020 – August 12, 2021)
Source: IG (You can click on it for a larger image)
For EUR/USD, the critical level is 1.17. It’s not just a round number but the low so far this year was at 1.1704 on March 31 and there is now a clear risk that support there will break, although short sellers should be wary of a bounce first that could stretch to 1.18 or even 1.1850 near-term. Once it breaks though, there could be major further falls, with the 1.1602 low touched on November 4 last year the obvious next target.
Week ahead: Eurozone GDP and inflation
Turning to the coming week, there is little on the Eurozone economic calendar of note. Eurozone second-quarter GDP data Tuesday are second estimates and the CPI figures for July the next day are also revised numbers. That leaves the GfK estimate of German consumer confidence and German producer price index numbers for July, both released Friday, as the only statistics of note.
— Written by Martin Essex, Analyst
Feel free to contact me on Twitter @MartinSEssex