EURUSD forecast for 14.09.2020

2020-09-14

EUR/USD forecast: ECB set the euro bulls backDmitri Demidenko

Fundamental euro forecast for today

The European central bank managed to weaken the euro

To make a winning bet, one should anticipate the strategy of the major players. When I suggested we should sell the [EUR/USD][1] on the [rise above 1.19][2] after the ECB September meeting, I presumed that the Governing Council won’t press the euro down at the press conference. However, I expected the ECB officials to target the euro a little later. I was right. Christine Lagarde, first, surprised the market by her neutral tone concerning the euro exchange rate. Next, the Governing Council members resorted to verbal interventions. Finally, the European Central Bank set the euro rally back, and the sell trades yielded profits.

According to Philip Lane, the upward revisions in the euro-area inflation growth have been “significantly muted” by the stronger euro. European Central Bank chief economist used tougher language than President Christine Lagarde did at the press conference following the ECB meeting. On the next day, Lagarde noted that the euro’s appreciation partially muted the positive influence of the asset purchase program on the euro-area economy. Like Lane, she also expressed concerns about the current economic state. Bank of France Governor Francois Villeroy de Galhau also said the exchange rate “does matter for inflation and monetary policy”.

Dynamics of the euro exchange rate

Source : Bloomberg

The ECB has completed its mission. The [EUR/USD][1] bulls have been set back, and they will hardly go against the European central bank. What’s next? To buy or not to buy the euro? On the one hand, the EU doesn’t have such problems with the boosting of the monetary stimulus as the US government. The Democrats and the Republicans still fail to agree on the additional aid package. The EU canceled the rules about fiscal consolidation amid the pandemic, and it won’t stop stimulating the economy. French Finance Minister Bruno Le Maire said it would be strange to set the date of the EU budget rules return as it is not clear when the crisis ends. So, the stimulus will hardly be abandoned in 2021.

The QE program allows the EU governments to borrow money at low interest rates. According to UBS, the net supply of bonds in Europe in 2020 will be - € 73 billion, compared with + € 182 billion in 2019. The ECB is buying more bonds than countries issue, which has increased the German 10-year bond yield to the level of -0.484%. The Italian bond yield hasn’t exceeded 1% since late July.

Dynamics of euro-area bond supply

Source : Wall Street Journal

On the other hand, the [EUR/USD][1] bulls can’t benefit from the divergence in the economic expansion any longer. It is not steady. After a surge in the third quarter, following the removal of the restrictions, the euro-area growth should slow down in the fourth quarter. So, the growth-gap between Europe and the USA won’t be so wide as it was before. This fact may encourage the euro bears to break out the supports at $1.18 and $1.177, which should increase the risk of the euro’s fall.

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Price chart of EURUSD in real time mode

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