EUR/USD: outlook and forecast

We have been bearish on our posts in recent months in terms of EUR/USD but in the last week, the Euro has moved higher so is the long-term downtrend going to end or is the rally a selling opportunity? Our view of the Fundamentals, sentiment, and technicals below.

There is talk in the media that after eurozone inflation coming in the above forecast we could see the ECB move to cut stimulus: Euro area headline HICP inflation rose 81bp in August to 2.97% YoY, well above expectations. Core HICP inflation, excluding energy, food, alcohol, and tobacco, rose 88bp to 1.59% YoY. The sharp rise in inflation can be seen on the chart below.

While we have a steep rise core inflation is only 1.5% which is nowhere near the inflation levels in the US and like the Fed, the ECB sees inflationary pressure as transitory and expect it to fade. The ECB will not wind down stimulus.

In fact, against a backdrop of rising inflation they have been increasing stimulus at a rapid rate. The ECB balance sheet has moved sharply higher by €139bn to hit fresh ATH at €8,191.3bn on QE and as Receivables from IMF gained €122.4bn. ECB’s total assets now equal almost 80% of Eurozone’s GDP vs Fed’s 37%, BoE’s 39%, and BoJ’s 133% (double the size when measured as % of GDP)  which we can see on the chart below:

If we look at the last Euro zone economy: “The euro zone economy grew 2% in the second quarter, the European Union statistics office said confirming its earlier reading as the easing of coronavirus restrictions spurred economic activity after a brief recession.” (Marketwatch) 2% is a dire number if you look at the US it was 6.5%! Another problem for the zone is the uneven recovery with nations such as Spain, Portugal, and Italy, lagging the stronger nations such as Germany, Austria, and the Netherlands.

The poorer nations cannot do without ECB support at the present time and stimulus will be kept in place. In terms of the interest rate outlook it favors the US going forward and the US economy is far stronger.

The big day for the pair could be Friday when we have Non Farm Payroll the market has sold the USD as we come into the number yesterday Private payrolls rose by 374,000 in August, well below estimates of 600,000 though above July’s 326,000, according to ADP.

In terms of Non-Farm Payroll Goldman Sachs said the ADP report “suggests potential downside” for Friday’s number. Goldman already is forecasting below-consensus payroll growth of 600,000. Will this happen it might but if we look at ADP data there is no strong correlation at all and we expect a number at our above consensus to support the USD. Concensus is for 750k jobs added only a huge miss is likely to hurt the USD.

Technical Analysis

On the weekly chart, we have resistance at 1.1900 and support at 1.1800 – If we move back through 1.1800 we would expect a move down to 1.1400. On the daily chart we would see the euro as a sell to first level resistance at 1.1900 on weakness off the level, with a stop back behind second level resistance or if we dont rally, we see the EUR as a sell on a break of 1.1800 stop behind 1.1900.

Research provided by LearnCurrencyTradingOnline.com

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