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Euro price forecast 22 January 2021

2021-01-22

2021-01-22

Euro has a compass. Forecast as of 22.01.2021Dmitri Demidenko

If you do not want to lose being in a losing position, you should create confusion. It is difficult to discourage investors who are willing to buy the [EURUSD][1]. The best way to press down the euro is to address uncertainty. Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

Christine Lagarde failed to drop the euro, but she didn’t let the single European currency grow, which could be recognized as the ECB success under the current conditions. Although the Governing Council admitted that concerns about the rapid strengthening of the euro have eased, and the euro-area bond yields increased, the [EURUSD][1] bulls failed to draw the price above figure 22 bottom. The reason is the confusion created by Lagarde.

What is good, what is bad. At a press conference shortly after the policy announcement, Lagarde spoke about both positive and negative aspects of the development of the world and European economies. As positive sides, Lagarde enumerated the beginning of vaccination, the Brexit deal, the European Rescue Fund, a decrease in political uncertainty in the United States, and the success of the euro-area manufacturing. The negative points are the pandemic and lockdowns in the euro-area countries, the likely double-dip recession, and stubbornly low inflation.

The Governing Council stands ready to adjust the pandemic asset purchase program but doesn’t say how exactly. Most of the uncertainty must result from Christine Lagarde’s announcement that PEPP will be scaled up or down based on market data, including terms and conditions of bank lending and sovereign and corporate bond rates. It would seem that the ECB suggests yield targeting following the example of the central banks of Japan and Australia. Still, unlike them, the ECB uses not one but several criteria. The central bank doesn’t explain how exactly it should adjust its asset purchases. The market is confused, which is traditionally supports safe-haven assets. That is why the [EURUSD][1] could not rise high.

Christine Lagarde noted that financial conditions are the compass, and inflation is the anchor. At the same time, the fact that the ECB asset purchases under the PEPP are scaling down supports the euro.

Dynamics of ECB asset purchases

Source : Nordea Markets

ECB has given way to the Fed, whose meeting will highlight the last week of January. The Federal Reserve must be satisfied with the increase of inflation expectations suggested by different market indicators, including bond breakeven inflation rates, interest rate swaps, and hedging costs. But isn’t it an illusion? According to the Baupost Group, the US central bank and government have convinced investors that the risk has simply disappeared. As a result, the market cannot fulfill its function of determining prices. __

Dynamics of US inflation expectations

Source : Bloomberg

In fact, the growth of the US stock indexes during the COVID-19 pandemic and GDP downturn is not natural. The higher the [S&P 500][2] grow, the more likely the correction is to start. If the US equities go down, the euro will be pressed down.

Weekly [EURUSD][1] trading plan

If the euro-area PMI data are strong in January, it will signal that the euro-area economy has adopted to the pandemic. In this case, the [EURUSD][1] could rise above 1.22. Hold up the longs entered at [1.208 and 1.2125][3], but prepare for the violent price swings. As I noted earlier, the euro rally won’t be easy.

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. my.liteforex.com/trading/chart?symbol=EURUSD&returnUrl=true
  2. my.liteforex.com/trading/chart?symbol=SPX&returnUrl=true
  3. www.liteforex.com/blog/analysts-opinions/how-long-will-the-eurusd-be-falling-forecast-as-of-18012021/