Euro price forecast 4 February 2021

2021-02-04

Euro suffers losses. Forecast as of 04.02.2021Dmitri Demidenko

The slower the vaccination campaign progresses, the more likely are the lockdowns to continue and the recession to start in the euro-area. Besides, the Eurosceptics use the authorities’ failures for their purposes, which presses down the [EURUSD][1]. Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

Donald Trump lost the presidential election due to the pandemic. At first, the White House did not recognize the threat and then very slowly closed the economy for a lockdown. In the first wave of COVID-19, the EU acted much more efficiently, laying the foundation for the [EURUSD][1] uptrend. However, the slow vaccination in the euro area presses down the euro bulls and the EU governments. Eurosceptics go ahead, and the rise in political risks contributes to the euro fall.

Marine Le Pen appears to be almost the only serious opponent of Emmanuel Macron in France’s 2022 presidential elections. Their confrontation, which ended in the victory of the current head of state, triggered the euro rally in 2017. Nobody knows what will happen this time. Nor is there any certainty that Mario Draghi will save Italy. Yes, the ex- president of the ECB is most likely the best person for the worst job. Yes, financial markets were optimistic about his willingness to manage Italy’s political crisis, which is evident from a narrower yield spread between Italian and German bonds. Still, it will be complicated for anyone to bring order to the chaos in which Rome lives today.

Dynamics of Italy-Germany 10 Year Bond Spread

Source : Wall Street Journal

According to Bloomberg research, the euro-area economy is currently operating at 95% of its pre-pandemic capacity due to lockdowns. This is the equivalent of losing €12 billion a week. The euro area is several weeks behind the US in vaccination. The US will soon return to full- fledged work while the eurozone will maintain existing restrictions, which will cost it € 500-1000 billion within one or two months. Thus, the vaccination campaign directly impacts the economy and allows Eurosceptics to go ahead, which puts pressure on the euro. There is a clear divergence in economic growth, which is reflected in the different rates of the US and euro-area PMIs.

Dynamics of PMIs

Source: Wall Street Journal.

I don’t think that the surge of the euro-area inflation from -0.3% to 0.9% in January will be the reason for the ECB to pull back on the pandemic emergency purchase program. The rise in consumer prices resulted from temporary factors, and the Governing Council is likely to ignore it.

The US dollar is supported by the Treasury yield growth ahead of the auctions. In the week ending Feb 14, the Treasury plans to place 3-year bills, 10-year and 30-year bonds totaling $ 126 billion. The interest rates on the securities are rising, and investors remember that the growth of Treasury yields in January resulted in the greenback strengthening.

Weekly [EURUSD][1] trading plan

The current Forex sentiment makes banks abandon bullish forecasts for the euro. Nomura exits [EURUSD][1] longs, and Deutsche Bank says the pair can go down to 1.18. It is still relevant to hold down shorts entered at [level 1.208][2] and enter short-term sell trades at least until the [EURUSD][1] goes up above the indicated level.

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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