Euro price forecast 29 January 2021

2021-01-29

Euro declares war. Forecast as of 29.01.2021Dmitri Demidenko

The verbal interventions of the European Central Bank could enrage Washington. And the ECB needn’t have interfered with the currency rates under the current conditions. The divergences in the economic expansion and vaccination rates press down the [EURUSD][1]. Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

If the ECB is willing to discourage investors by suggesting a potential interest rate cut, it should not mention the rise of Germany’s consumer prices. In January, the German inflation has surged from 0.7% to +1.6% and is likely to push the euro-area inflation up. This fact could mean that the European Central Bank will end the pandemic emergency purchase program earlier than expected, which could have supported the [EURUSD][1] bulls. However, the euro bulls haven’t enjoyed the success for a long time.

Following the president of the central bank of the Netherlands, Klaas Knot, the Governor of the Bank of Finland, Olli Rehn says the ECB will spare no effort to stimulate the inflation growth and is monitoring the euro exchange rate. According to Commerzbank, the choice of the European regulator’s information campaign means that it has declared a currency war. The Governing Council’s officials’ emphasis on cutting the interest rates and ordering research, whether the weakening of the US dollar is connected with a large-scale fiscal stimulus, suggests that the ECB is worried about the current euro exchange rate rather than the speed of its strengthening.

Dynamics of EURUSD and trade-weighted euro

If the Commerzbank is correct, the ECB’s verbal interventions should disappoint Janet Yellen, who promised to stop other countries’ attempts to artificially depreciate their currencies. Besides, the inflation rebound could mess the ECB plans. The rise of Germany’s consumer prices could have resulted from temporary factors. However, according to the ING, ECB obviously underestimates the potential inflation growth following a period of persistently low inflation. The CPI increase will worsen the dispute among the Governing Council’s members, encouraging the ECB to start monetary normalization. If so, the [EURUSD][1] trend should turn up. However, the euro bulls are now concerned about defending their positions and preventing the euro from a deeper fall.

Slow vaccination progress in Europe and the fact that the USA, unlike the euro area, won’t slide into a double-dip recession press the euro exchange rate down. In fact, the ECB is going too far: verbal interventions are not needed in the current situation, they risk provoking the White House’s anger.

In 2020, the US economy contracted 3.5%, the worst since the end of World War II and the first recession since 2009. However, thanks to fiscal stimulus of $900 billion from Donald Trump and $1,900 billion from Joe Biden, the US GDP, following a weak start in 2021, should rapidly rebound in the next quarters. The IMF notes that the US economy has enormous growth potential, and the World Bank calls for winning the war on COVID-19 first and paying off debts later.

In contrast to the Americans, generously spending money, the € 750 billion European Recovery Fund, according to the ECB, will lead to a more than modest 1.5% expansion of the euro-area GDP.

Influence of European Recovery fund on euro-area GDPs

Source : Bloomberg

Weekly [EURUSD][1] trading plan

Therefore, the economic growth gap and different paces of vaccinations in Europe and the USA will continue pressing down the [EURUSD][1] in the short run. If the price breaks out the support at 1.208, it could slide down towards 1.204, 1.199, and 1.195.

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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