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Forecast for EURUSD: EURUSD funndamental and technical analysis

2020-10-06

2020-10-06

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.

Technical analysis of the USD index

First, we’ll analyse DXY’s monthly time frame to have a general picture.

As seen in the chart above, the index is consolidating in a triangle. The upper and lower edges have been retested and are proved to be the essential key levels. To do technical analysis, I’ve used Stochastic, Bollinger Bands and divergence signals. I recommend reading my training articles in case you’ve forgotten about those instruments.

In close-up, we see that DXY is consolidating after a drawdown. The index is located in the lower green zone, which indicates bearish sentiment. Stochastic is in the oversold zone. However, we may speak of a reversal only after October’s candlestick has closed. A sharp pullback from the trend line won’t most likely happen, and we’ll see the double bottom pattern, which coincides with the index’s 2017 and 2018 moves (marked in black). I drew two possible scenarios in the chart: double bottom with breakout of the trend line (in blue) and with consolidation (in purple). It’s hard to say for now which scenario will be realized.

That’s why we need to single out what these two scenarios have in common. They both don’t suggest the global trend’s breakout before the end of January 2021, and point to a small growth to 95.24 - 97 in an optimistic scenario. Otherwise, the index will stay at the current levels, consolidating up to the end of the year.

Consolidation at the current levels is confirmed on the weekly time frame. As shown in the chart, DXY got into a trading range, and substantial efforts will be required for getting out of this range. Stochastic and MACD confirm consolidation too. However, resistance levels have accumulated above in the price chart, and a strong retracement shouldn’t be expected for that reason. The priority scenario is the index’s fluctuation in the range of 91.8 - 95.2 up to the end of the year.

Given the strong indirect correlation between the dollar index and the EURUSD pair, let’s take a look at the daily time frame to analyse the euro in detail.  As seen in the chart above, the DXY index is near strong support levels:

  • Pivot monthly level  (93.51, blue line)
  • Weekly triple EMA (bold red line)
  • Lower band of the Double BB neutral zone (dark green area)

As triple EMA’s angle is positive, the index remains in the neutral zone’s lower part near Fibonacci retracement pivot points.   So, an upward movement is more logical from the point of view of market balance of forces.

Trading plan for EURUSD

To form a trading plan for  EURUSD, let’s get back to the global picture one more time. The pair has been in a local bearish trend since 2008. Its movements are now limited by the white triangle, while the ticker itself is located at the edge and is trying to consolidate above the key value. A strong surge in trading volumes in March 2020 catches the eye. In fact, it was a barrier which fixed the support level at 1.06 and defined a vector for an ascending movement (the triangle’s lower edge, green line).

Two charts are displayed above: the upper one is for DXY, and the lower one is for EURUSD. Following our scenario of the USD index’s consolidation in a triangle, we may presume that EURUSD will have mirror dynamics. Thus, a trend breakout will be false, but the pair will be moving downwards, trying to consolidate above the key level.

Placing this scenario projection onto the wave structure we had earlier, we have an almost 100% coincidence. However, the time scale should be adjusted. The second wave’s correction is expected to be long and may last up to the year 2022. There’s nothing unusual about this scenario as EURUSD had been forming a similar fractal the whole year 2019.

Trading plan for EURUSD for 2021

Thus, I made a clear trading plan for 2021:

  • Short positions at the current levels, at about 1.18;
  • Stop order above the previous local high and psychologically important level of 1.20;
  • Profit fixing at the upper limit of the next trading channel near the purple trend line at 1.138 EURUSD.

Trading plan for EURUSD for October

The euro is forming a bearish reversal this month, which is confirmed by the cascade of divergences marked as blue segments in the chart above. The red weekly triple EMA circled and went down. Stochastic is in a bearish trend, and can give a confirming signal of a fall if it retraces from the key level marked as a long bold line. MACD is curving below zero level with a crossover of its moving averages. This indicator isn’t showing any divergences, so we can’t speak of a reversal or cancellation of a newly forming trend. However, this signal, combined with some room for growth in the BB Neutral Zone, lets us suggest a potential growth.

So, the monthly trade’s entry point is at around  1.181 - 1.182 dollars for 1 euro.

Stop order should be placed above the local key level of 1.19.

Take profit will be in the local low’s area, at 1.163 EURUSD. Profit/Risk ratio is about 2.18 to 1.

Trading plan for the nearest weeks

I don’t see any convenient conditions for opening a good trade in the two coming weeks. The signs of an exhausted trend are obvious:

  • Trading volumes are falling
  • MACD bearish divergence (blue lines)
  • Stochastic is in the overbought zone, with a bearish crossover of moving averages.

In these circumstances, I recommend waiting for level 1.182 to open a short position, or for a good stop loss level located at the crossover of support level at 1.1757 in the area of R1 of Fibonacci weekly pivot point.

Final conclusion

The fundamental analysis suggests that amidst the pandemic, risk aversion supports the demand for the euro.  However, the risk related to the eurozone’s economic state is higher in the long term than the US’ because of the EU countries’ heterogeneous economies. The pandemic will be over, but economic problems and inflated debt will stay. Brexit continues to influence the euro too. Risk assessments vary, but obviously, it’s about billions of euros and pounds.  Despite all the stones cast at the US Federal Reserve and its printing press, the dollar remains the world’s reserve currency. It maintains demand for the dollar.

As a result, the bearish scenario will be given priority next month and year, which is confirmed by technical analysis. I don’t see any reasons to forecast the level of 1.3 in the nearest future. The euro isn’t expected to devalue fast, so few would want to hold short positions for a long time next year. October’s trade looks most interesting. I don’t suggest catching peaks in these conditions. Short positions can be built up with every new breakout of support and resistance levels. The most important task is to find [the right broker][3] with small swaps. Maintained for a long time, short positions may eat up most profits because of a broker’s fees.

That’s all for now. Those were my ideas about EURUSD’s development. The final decision is yours.

Take care of yourself and your money!

My next article will be devoted the pound sterling and [GBPUSD][4] / [EURGBP][2] pairs.

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Good luck and profits, everyone!

Best regards,

Michael @Hypov

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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/
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