We have seen a major upside move in the EUR since April and we are now above 1.22 can we break out and hold above 1.25 and move to 1.2500 then 1.2800 which many forecasters are seeing as targets on the upside? Below our view of the fundamentals sentiment and technicals.
The market has become optimistic about the euro and the market has bought forward the prospect of rate hikes. We have seen EU bond yields move up and we have seen the gap between US and EU bonds narrow:
In terms of the reason for the move up in EU bond yields: “The strength of economic data in the eurozone compared to the US appears to be feeding through to relative expectations for monetary policy in the two economies, which only recently levelled off even as the euro has continued to strengthen. We think the current pricing of rate hikes in the euro zone relative to the US is stretched – we do not expect the ECB to raise rates until 2026. As a result, we expect the euro to weaken against the Greenback as market expectations adjust to reflect the underlying economic prospects for the two economies.” (Capital Economics)
Before the last ECB Meeting many though stimulus would be cut going forward but the ECB are actually increasing stimulus which we can see on the chart below.
The uneven growth in euro zone means that the ECB cannot withdraw stimulus in the foreseeable future but the Fed, are now already taking about tapering their bond buying which should come in the next few months: We agree with this quote…
“We think that the Fed will be less doveish than the ECB , and that ECB rate hikes will be priced out, weighing on the euro. We expect US economic outperformance to support the dollar in the medium-term. Our year-end 2021 forecast for EUR/USD stands at 1.15.”(ABN AMRO)
The above is a long term forecast which we agree with but where could prices go to in the shorter term if the euro were to correct? our view of the key technical levels of support and resistance below:
The 1.2300 level is major resistance and if we view the EUR as a sell up into double trend line resistance if we take out this weeks highs with stop back behind chart highs. If we don’t rally then a break of nearby support is a sell with a stop behind this weeks high. We would be looking for a move down to 1.200 and then 1.900.
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