Euro price forecast 2 February 2021

2021-02-02

Euro is desperate. Forecast as of 02.02.2021Dmitri Demidenko

At the beginning of the year, the confidence in the euro strengthening was undermined. The divergences in the economic growth and the vaccination speed make investors doubt in the idea of the global GDP expansion and the [EURUSD][1] rise to 1.25. But there are still some optimists. Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

The worse it is, the better. The faster the US stock indexes were falling, the worse the US economic situation became, the more aggressively the Fed reacted to the recession provoked by the pandemic, the better it was with the adoption of the fiscal stimulus packages by Congress. However, the opposite is true for the economy and financial markets. The better, the worse. Raising forecasts for US GDP casts doubt on the need for the additional $ 1.9 trillion in aid. But for the ‘blue wave,’ Joe Biden’s stimulus plan wouldn’t have approved by the policymakers. The less the stimulus is, the worse the [EURUSD][1] bulls feel.

According to the Congressional Budget Office, the US economy will be able to return to its pre-crisis level by the middle of this year. By the end of 2021, the US GDP will grow by 3.7% and expand by another 2.2% in 2022. Average growth in 2021-2025 will be 2.6%, primarily due to large-scale fiscal incentives. The $900-billion aid package will add 1.5% to the US growth this year and next. A natural question arises, if everything is so good, why the US government should continue to accumulate debts on such a scale? Republican senators are confident that there is no need. They offered Biden a stimulus plan of $618 billion. Joe Biden, who must have been inspired by Janet Yellen’s announcement to play big, said he would insist on an aggressive stimulus.

Stock markets are encouraged by the idea of a $1.9-trillion aid package, the rapid speed of vaccination, and the decline in the number of COVID-19 cases, but something is wrong with the global risk appetite. The [S&P 500][2] started falling amid Jerome Powell’s press conference, and this is not accidental. The Fed Chairman convinced the markets that the US central bank would not pull back on the QE, but it is not enough amid the expansion of the bond issue volume. Is the current asset purchase at a monthly pace of $120 billion in fact scaling down the quantitative easing program?

Dynamics of difference in Treasury issue volume and Fed’s asset

purchases

Source : Nordea Markets

The widening gap between the Treasury bond issue and the Fed’s Treasury purchases is bad news for inflation expectations, debt holders, and dollar bears. Besides, there is a divergence in the vaccination rate (in the US, 7% of the population were vaccinated, in the EU - 2.2%), so one could suggest that the [EURUSD][1] uptrend has broken down.

However, there still some positive factors. The rise of Italy’s manufacturing PMI suggests that the idea of the global economic recovery and the euro strengthening could still work out. With a 13% share of machinery and equipment exports, compared with 4% in Spain, Italy is experiencing increased demand from a rapidly expanding China’s economy.

Dynamics of euro-area PMIs

Source : Bloomberg

Weekly [EURUSD][1] trading plan

The [EURUSD][1] bulls are desperately fighting for level 1.208. However, it will make sense to enter longs in the zone of 1.195-1.2 or if the price rolls back above level 1.215. Currently, it is relevant to enter short-term sell trades.

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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