Outlook and forecast: ECB and EUR/USD
Euro Analysis & Reaction to the ECB
In terms of EUR/USD, we are in a downtrend and expect further weakness in the euro – we are oversold in the short term but any rallies are selling opportunities and we expect far lower prices to unfold. Our view of the fundamentals sentiment and technicals below:
ECB Meeting and Monetary Policy
“By shifting their focus on reaching the 2% aim “well ahead” of the end of their projection horizon, the ECB conveyed the message that its monetary accommodation will be persistent.” (RABOBANK)
The ECB today did as expected and in their statement said they expect interest rates to remain “at their present or lower levels until it sees inflation reaching two percent well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilizing at two percent over the medium term. “They added: “This may also imply a transitory period in which inflation is moderately above target,” it added.
The above simply means the ECB expects to be more accommodative for a longer period of time.
No Broad-Based Recovery Coming in Euro Zone …
The ECB Can’t cut the stimulus and this has been obvious for a long time which we have pointed out in several previous posts – why? Because the poorer southern nations cannot take higher borrowing costs – Italy, Spain, Portugal, and Greece need the ECB to support them as their economies struggle to recover and all these nations just received more bad news.
“Europe is struggling to contain a surge in Covid-19 cases caused by the delta variant, but while several countries reimpose measures to control the spread.” (CNBC)
Last week France, the Netherlands, Greece, and Spain all announced new restrictions in a bid to cut the rise in Covid infections. Restrictions in the Southern countries which are desperate for tourist revenue are a crippling blow and Spain, Portugal is in deep trouble, and in Italy its situation critical.
Sentiment Still Euro Bullish
Despite the huge problems in euro zone speculators remain m long of the euro and are bullish on the view the Euro economy will make a broad-based recovery by next year – this view is not supported by the facts in our view and we expect large speculative funds to exit shorts on stop and go long. Two charts below one on speculative positions in EUR/USD and EUR/JPY and the other, general USD short Positioning on the COT:
Technical Analysis
On the monthly chart, we have resistance at 1.1900 and 1.200 and we have targets on the downside longer term of 1.1400 then 1.100. On the daily chart we would expect any rallies to fail back to 1.1900 and view the euro as a sell on weakness into the level. If we dont rally abd break daily lows at 1.1700, we would sell with a stop behind the 1.1800 level and 20 day moving average (green line) We have had low volatility in this pair recently but expect a change to higher volatility shortly.
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