Enclosed our updated outlook for EUR/USD In terms of the fundamentals, sentiment and key technical levels to watch.
In terms of the fundamentals, we see them as clearly in favour of the US economy over Euro zone. The US economy is growing strongly, consumer confidence is high and the impact of lockdowns has been less severe in the US than in Europe. “The near-term outlook for the eurozone remains weak given the tight grip of the third infection wave and despite the recent pick-up in the vaccination pace. (Oliver Rakau Oxford Economics.) We agree and the European economy will lag behind the US economy in the months ahead and bond US Bond yields will rise which will support the USD.
Bond Yields and Interest Rates
“The fast rate of vaccination, falling virus case numbers and an earlier lifting of restrictions in the US will continue to put greater upward pressure on government bond yields there than in the euro-zone. The ECB has expressed a greater willingness than the FED to push back on rising government bond yields.” (Capital Economics)
While the Fed say they have no intention of raising interest rates anytime soon, US Bond Yields are firm because inflationary pressure is on the rise and we think the market is underestimating the chances of an earlier than expected US interest rate hike.
4 x Charts EU V US Economy
The GS Effective Lockdown Index – a combination of official restrictions and actual mobility data from 46 economies, weighted by PPP GDP – remained broadly unchanged in the last week of April as ELI tightening in the Asia Pacific region was offset by easing in other regions. While we have some easing in Euro zone we are still a long way behind the US.
The two charts below show growth expectations for the US Economy against other G9 nations and also against the EU – Against growth expectations the USD is expected to firm
In terms of traders their optimistic about the zone recovering but the consumer isn’t.
The EU economy has deep structural problems and we think the market consensus about a strong broad based recovery is now priced in and see the upside in the EUR as limited and a further weakness unfolding.
Technical Analysis
The recent move above 1.2100 was not sustained and we now see any rallies back to first level resistance as selling opportunities on weakness a break of nearby support could see the whole recent up move retraced.
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