EUR / USD outlook bleak as traders rush to US dollars

Fundamental euro forecast: bearish

  • Traders have become addicted to the US dollar as high rates of vaccination in the US, the prospect of a strong economic recovery and the likelihood of the Federal Reserve tightening monetary policy will soon make it their preferred currency.
  • This is bad news for EUR / USD as the eurozone is seen as a backlog in vaccinations, an economic recovery that is still a long way off and another rate cut is still possible.

Euro price threatens to fall further

Last Thursday’s drop in the EUR / USD below 1.20 for the first time since December 1, 2020 was highly significant not only technically but also psychologically. It was a strong reminder to traders that the Eurozone is far behind the US (and UK) in vaccinating its citizens against the coronavirus and therefore any economic recovery is likely to lag as well.

EUR / USD price chart, daily time frame (July 3, 2020 – February 4, 2021)

EUR / USD chart

Source: Finance Prop (You can click on it for a larger image)

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In recent months, the US dollar has become the markets’ preferred safe haven, but as the global economic recovery sets in, it could also prove to be the leader on its way up. As previously mentioned, traders are confident that the currencies of countries leading the way in vaccinating their citizens against the coronavirus, such as the US and UK, will be the first to recover economically from the slump caused by the pandemic.

That means central banks such as the Federal Reserve and the Bank of England will also be the first to tighten monetary policy, perhaps while the European Central Bank is considering another rate cut to boost activity.

All of this is bad news for EUR / USD, which is now back to where the ECB would like it to and could potentially fall to the lows around 1.16 last seen in early November – although of course not in the short term.

Week ahead: German inflation, trade and industrial production

As for next week’s data, there is little market movement on the agenda. The high point could be Wednesday’s latest inflation data for January, which is expected to rise to 1.0% year on year from the previous 0.3% drop. Otherwise, the German and Eurozone industrial production and German trade figures are on the calendar to.

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Daily -29% 4% -13%
Weekly 23% -3% 7%

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— Written by Martin Essex, Analyst

Please do not hesitate to contact me on Twitter @MartinSEssex

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By Jonathan Prop

Jonathan Prop is an independent financial advisor. He has been working in finance for the last 20 years. After retiring early in his 40s, Jonathan decided to help others get to grip with financial markets, particularly his area of expertise - forex!

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