Euro price forecast 2 March 2021

2021-03-02

Euro believes ECB’s words. Forecast as of 02.03.2021Dmitri Demidenko

When the market doubts the Fed’s willingness to remain passive for a long time and believes the ECB should hold back the euro-area bond yield growth, the euro can’t but fall. Let us discuss the Forex outlook and make up a [EURUSD][1] trading plan.

Weekly euro fundamental forecast

Do not believe your eyes, believe your ears. Perhaps the European Central Bank chose not the best time to announce its intentions to counter the euro-area bond yield growth, but investors believed the words. Investors ignored a slowdown in the ECB assets purchases volume within the quantitative easing program and started to sell the [EURUSD][1] amid the strongest verbal intervention by the ECB officials.

Bank of France (BoF) Governor Francois Villeroy de Galhau said the European Central Bank “can and must react against” any unwarranted rise in bond yields that threaten to undermine the euro-area economy. The ECB’s concern is natural, as the euro-area yields are rising, unlike the trade-weighted euro, which was targeted by verbal interventions in January-February.

Dynamics of swap rates and euro

Source : Nordea Markets

ECB says it is willing to accelerate asset purchases but reduces the purchase pace, in fact, which does not seem to be the right solution. In the last week of February, the ECB settled €12 billion ($14.5 billion) of net purchases under its emergency program, compared to €17.2 billion the week before. However, the total figures have been distorted by the enormous volumes of redemptions. The French government alone redeemed a 3-year bond last week, which had €31 billion outstanding.

Dynamics of ECB net asset purchases

Source : Bloomberg

When the market believes the ECB’s words and continues to test the Fed’s persistence, the [EURUSD][1] can’t but fall. Investors prefer to face facts. While the growth in Treasury bond yields due to the rapid recovery of the US economy and expectations of fiscal stimulus is logical, the increase in the euro-area debt market rates amid a double- dip recession is not a norm. And the ECB is willing to interfere in the bond market to overcome the situation.

According to Bloomberg estimates, if the US Congress adopts the $1.9 trillion aid package offered by Joe Biden, US GDP will return to pre- pandemic levels by mid-2021 and will expand by 7.4% by the end of this year. The euro area is lagging far behind. Divergence in economic growth continues to support the [EURUSD][1] bears. However, Forex likes wise and forward-looking traders.

Due to massive fiscal stimulus, the US has accumulated significant deferred demand, which a record savings level confirms. The US manufacturing sector will not grow fast enough to satisfy the demand in 2021. US domestic market will require imports, creating a strong tailwind for European exports. That is why I believe that the [EURUSD][1] uptrend should resume. However, the scenario, implying the US should support the euro-area growth, should take its time to work out. In the meanwhile, the euro could continue falling.

Weekly [EURUSD][1] trading plan

The euro bulls face a hard challenge, and they should not allow the price to break out the supports at 1.2 and 1.1985. If the buyers hold up the supports, the [EURUSD][1] will continue consolidation in the range of 1.2-1.22. If the price breaks out the support levels downside, the euro will continue sliding down towards $1.194 and 1.188. Take your trading decisions according to the closing prices of the bars during the support tests.

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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