Euro price forecast 8 December 2020

2020-12-08

Euro needs an operation. Forecast as of 08.12.2020Dmitri Demidenko

The [EURUSD][1] will go down only if the European Central Bank takes radical measures. Neither QE boost nor the verbal interventions can discourage the euro bulls. Let us discuss the Forex prospects and make up a trading plan.

Weekly euro fundamental forecast

A puzzle: which economy is turning down and the financial markets are rising? At first, it seems to be the USA, where the employment rate has been shrinking for the seventh consecutive months. It means the US GDP growth is slowing down, and the stock indexes are hitting all-time highs. However, the right answer is the euro area. The euro-area economy is about to face a double-dip recession, and the euro is rallying up. The financial conditions in the euro area are much more controversial than in the USA. In addition to the economic problems in the euro area, there is the Brexit issue and the unwillingness of Hungary and Poland to support the idea of the Rescue Fund. Furthermore, the ECB doesn’t want the euro to strengthen.

According to a Bloomberg study, economic activity continues to slow. This is especially acute in Germany, Italy, and Spain, where the rise in the number of COVID-19 cases and the newly imposed restrictions are pressing down the economy. It is natural that, under such conditions, the ECB is eager to help it with additional monetary stimulus.

Dynamics of PMIs of major advanced economies

Source : Bloomberg

Under normal conditions, the monetary easing expectations, including an expansion of the emergency asset purchase program by €500 billion and its extension by 6-12 months, would most likely weaken the euro. However, investors are now more confident that the ECB can close bond spreads than to bring the euro area out of deflation, not to mention the ability to drive the CPI to its 2% target. Based on interest rate swaps, inflation expectations indicate that consumer prices will rise by an average of 1.25% over the next five years.

It is a paradox, but Christine Lagarde’s statement made 9 months ago that the central bank should not interfere with the bond spreads convinced investors that this is what the ECB is doing now. The ECB cannot say directly that it targets yields following the example of the Bank of Japan, but the euro-area bond market rates signal that the central bank controls the yields.

Dynamics of spreads between the euro-area bond yields and their

German peers

Source : Financial Times

Foreign investors are willing to buy the Portuguese or Greek bonds, as the ECB supports these papers. The capital inflow into the European markets is a powerful growth driver for the [EURUSD][1].

How could the ECB officials surprise investors? By the QE extension not by six but by twelve months? Bloomberg has already revealed this possibility. By verbal interventions? They don’t have a long-term effect. Another matter is a sharp rate-cut. The euro-area economy has experienced a shock that occurs once in a hundred years, so that it could be a reason for the rate cut.

Weekly [EURUSD][1] trading plan

I think the ECB won’t break the [EURUSD][1] uptrend even if it expands the emergency asset purchase program, extends the QE through the middle of 2022, or resorts to verbal interventions. If the pair drops below 1.208, there will be just a local correction encouraging investors to buy. Only radical measures of the central bank can turn the euro trend down.

Price chart of EURUSD 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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