Does the USD have more weakness ahead of it? – EUR/USD forecast
The market has taken the win by Biden as bearish the USD but is it? In terms of some currency pairs, it might actually confirm the USD and in this article, we will look at the outlook for EUR/USD and looking at bond yields and their influence on currency pairs. In terms of EUR/USD bond yields point to a correction in the Euro…
“S&P 500 futures were up 0.5% and stock benchmarks across Asia and Europe were in the green. Treasury yields stayed above 1% In a sign that traders are still willing to pile on risk.” (Reuters)
The market is betting on a weaker USD going forward and yesterday, The fell on the Georgia results to a near-three-year low against a basket of six major currencies. The weakness has been driven by traders betting on big stimulus from the Biden Administration growing U.S. trade and budget deficits would weigh on the greenback. Joe Biden was formally recognized by Congress as the next U.S. president ending two months of failed challenges by Donald Trump to overturn the result.
In terms of the case for more USD weakness it’s compelling with not only the Government looking to spend big but also the Fed expanding its balance sheet, but it could now firm from current levels and mount a short-covering rally and in this article, we will look at the EUR/USD which has been in a firm up trend but could well mount a trend reversal for the following reasons:
Treasury Yields moved above the psychological 1% level and the yield is now attractive compared with Euro zone bonds such as Germany’s 10-year Bund which is a negative -0.55%. : there will be more spending which means bigger deficits, more [Treasury] supply which should push interest rates higher, and US Treasuries if they continue to rise will attract capital inflows due to yield.
How important Yields are can be seen on the chart showing US V EUR Bond Yields. As Soc Gen notes: “The last time the dollar was this weak, it was also falling despite supportive rate moves, and it reversed all of the fall quickly.”
In terms of the key US interest rate contract to watch it’s the 10 Year Note chart below which shows a strong breakout to the upside.
T NOTE 10 YEAR: The note has broken out of an ascending triangle and breached the key 1.00 level – if we continue to hold the level and move higher watch for the USD to firm up. Keep in mind this rally and breakout is against a backdrop of the Fed trying to hold rates down, but the market is seeing inflation and higher borrowing costs ahead.
Additional Fundamentals & Market Sentiment
there is a view that the euro will hit 1.25 or 1.27 but this is unlikely in our view It didn’t get there in 2017 when euro fundamentals were a lot more bullish with the ECB talking about raising rates and the Eurozone economy was outperforming. At present European PMIs, inflation, and economic data are underperforming in the US, there are greater lockdowns there, and the ECB is more accommodative as measured by central bank assets to GDP and we have negative rates as well. Finally, speculators are heavily long the EUR and this means we are due some corrective action and possibly a trend change. Key levels to watch on the chart below.
Technical Analysis
EUR/USD DAILY CHART: The EUR has made a double top and is now heading down to the 1.2200 level which is also the 20 Day MA (Green Line) which the euro has traded above since 1.1800. If support gives way, we expect further selling down to 1.200 then 1.1800.
Research provided by LearnCurrencyTradingOnline.com
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