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Forecast for EURUSD: EURUSD funndamental and technical analysis

2020-09-24

2020-09-24

EURUSD analysis. Actual trading plan and multi-year scenario as of 24.09.2020Mikhail Hypov

This article will be devoted to the Forex market’s most popular pair - EURUSD. Almost two months have passed since my previous [forecast][1]. Is the scenario still up to date? What are the euro’s current prospects? Is it safe to hold money in the single European currency? Let’s find out!

The article covers the following subjects:

EURUSD Fundamental analysis

No matter the currency pair, fundamental analysis is always hard to do, because there are too many factors that affect the final rate. However, there are things that absolutely need to be mentioned, when we’re analysing the euro.

The first one: the ECB’s refinance rate has been in the negative zone at minus 0.5% since 18 September 2019. The European Central bank is in a complicated situation, as even the negative rate cannot raise inflation.

As shown in the chart above, the inflation rate is in the negative zone at minus 0.2%. The ECB’s goal is holding inflation back at the level of 2% and higher. Obviously, even a negative rate won’t prevent deflation during a crisis and a risk aversion period.

Deflation means that money is getting more expensive. It isn’t better than hyperinflation, and it is as damaging to the economy as hyperinflation.

There’s no sense in lowering the rate further. That would harm the European economy even more. Basically, the ECB has only one monetary policy tool at the moment: QE, or in other words, “money printing”. It’s what it is doing now.

The chart above shows that the M3 multiplier has already exceeded 10 percentage points and has been growing since March.  Interestingly, the most part of money is used to credit the government and not the private sector. Europe is following the USA, pumping the debt bubble and buying its own debt. In the short term, this approach can support the financial sector, the stock market, and the eurozone’s economy, indirectly. However, this effect can’t last forever.

Bloomberg has estimated ECB Governing Council members’ sentiment and influence gauge. As seen in the chart above, the doves are winning, and a soft monetary policy is likely to be kept. The eurozone’s economic growth could change the game, but the current situation is worse than the ECB’s forecasts.

The chart above shows that the eurozone’s PMI soared after Q1 and Q2 disastrous values. According to the latest data, August’s stats returned to a neutral position at 50.1 instead of the expected value of 51.9.

What do these numbers mean?

PMI (Purchasing Managers Index) measures businesses’ volume of purchases. When it’s above 50, it means that the volumes of purchase increased, compared with the previous month. When it’s below 50, the volume of purchase dropped.

The eurozone’s economy switched to the hibernation mode during the global quarantine period, and businesses didn’t make any purchases, hence the collapse of the index. After the lockdown was lifted, the index predictably recovered. However, the past months’ results point to a poor economic state. The level of 50 shows no development at all, in essence. Businesses stand still, waiting for the second wave.  That’s how the ECB explains such moderate results.

The concerns aren’t groundless, based on the latest news.

The average increase in new daily coronavirus cases in the five largest European economies has already reached March’s peaks. A new full-scale lockdown isn’t being discussed yet, but many countries have already started toughening quarantine measures. So, economists aren’t feeling optimistic.

Fundamental analysis of EURUSD. Results

In a simplified way, we have a chain of regularities. On its left side, there are statistics on Covid cases. On the other side, there’s the Euro growing more expensive.  However strange it may sound, but the coronavirus is the main factor that affects the Euro rate.

Until the pandemic is defeated, the economic sentiment will remain depressive, which doesn’t contribute to any business activities. On the contrary, it stimulates demand for money and savings.  As long as this chain remains intact, the euro will be in a global uptrend.

Another news to mention is that JPMorgan has moved its UK assets to Frankfurt, Germany’s financial capital.  The transfer amount is almost $230 billion! This decision is directly related to Brexit and is quite demonstrative. It would be interesting to see how it affects the [EURGBP][2] pair. It’s hard to estimate this event’s immediate influence on the euro rate, but we can expect that the single European currency will appreciate even more.

The ECB has already expressed its concern about the euro’s growth, even if rate control isn’t its responsibility. However, the signal has been heard, and big hedge funds are reducing long positions in the euro, according to the CFTC. At the same time, Goldman Sachs says the fair [EURUSD][3] rate is at 1.3. So we can expect that the rally will continue. To put the final point, let’s move to technical analysis.

Technical analysis of EURUSD

[Two months ago,][1] I build EURUSD’s global wave structure. It looks like the following:

Based on the chart above, the Eur to Dollar pair is in the third wave of corrective wave (B). There’s no reason for revising the global cycles’ structure now.

I have marked a 5-wave impulse in the weekly chart.

The price has fitted well into the marked wave structure so far (see the chart above). Will it continue doing so?

As we see can see, the USD index mirrors the EURUSD pair. Over the 26 years displayed in the chart, the correlation ratio has deviated from “1” only a couple of times.

So, to have an actual scenario for [EURUSD][3], we need to analyse the dollar and make sure that both scenarios don’t contradict each other. It’s what I’ll continue my analysis with. I’ll update the scenario for the USD index, EURUSD and EURGBP, and make a trading plan for the nearest weeks and months.

Bookmark the article and come back next Tuesday!

Good luck and profits, everyone!

Michael @Hypov

P.S. Did you like my article? Share it in social networks: it will be the best “thank you” :)

Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

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Price chart of EURGBP in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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  1. www.liteforex.com/blog/analysts-opinions/eurusd-forecast-for-the-next-week-and-month/
  2. my.liteforex.com/trading/chart?symbol=EURGBP
  3. my.liteforex.com/trading/chart?symbol=EURUSD
  4. my.liteforex.com/?category=analysts-opinions&slug=eurusd-analysis-actual-trading-plan-and-multi-year-scenario-as-of-24092020&openPopup=%2Fregistration%2Fpopup&utm_source=blog&utm_medium=article&utm_campaign=bonus
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