We remain heavily bearish of EUR/USD over the longer term but in the short term we may see a bounce but that bounce in our view will be a selling opportunity. Our view of the fundamentals, sentiment and technicals below:
In terms of the fundamentals there long term bearish – the ECB is dovish and will remain so and bond yields are unlikely to increase as the ECB will continue with stimulus. Economic growth remains poor and the poorer nations in the South such as Italy and Spain remain in deep trouble…
“We’ve also previously argued that ECB has shifted dovishly as Lagarde has become more Draghi-like. Further moves in this direction is possible, for instance in the upcoming strategy review (in September) which may result in something similar to the Feds AIT (average inflation targeting). The initial take-away of an AIT-regime is indisputably dovish for the front-end pricing of the ECB, which has gotten a tad carried away by the “inflation regime shift” debates in our opinion.” (Nordea)
The ECB are very dovish as the recent comments from ECB Members below shows:
Bond yields remain at zero and are unlikely move up anytime soon:
Inflation is not a big risk in euro zone: “As TS Lombard points out; fears regarding unemployment recede as the reopening boosts consumer confidence, slack is holding wages down.
The big risk is the spread of the Delta variant Spain’s Ibex which is “Delta proxy”, is trading down
“While DAX has continued holding around recent highs, one of the big summer tourist reopening plays, Spain’s IBEX, has continued to under perform big time. July is here and southern Europe should be flooded by vaccinated tourists, but things seem slow.” ( The Market Ear)
In terms of the outlook for the US economy its better than Euro zone – stimulus will shortly be cut back as inflation rises. Bond yields are higher in the US than in the EU and the gap is likely to widen as the US economy continues to out perform the EU and a rate hike, in the US is likely next year.
Technical Analysis
On the weekly chart we have resistance at 1.1940 and key resistance at 1.200, any rallies are selling opportunities in our view and we expect a move down to major support at 1.1400. On the daily chart, support and resistance levels line up with the weekly chart. Any rallies above 1.1900 are selling opportunities back through the level and if we were to move up to test 1.200, we view the Euro as a sell on weakness back from the level.
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