Euro price forecast 13 April 2021

2021-04-13

Will euro lose the grounds? Forecast as of 13.04.2021Dmitri Demidenko

Life is not easy for those who live at the expense of others. There comes the moment when one needs to choose which side to take, otherwise, they can lose everything. How will the escalation of the US-China conflict over Taiwan affect the [EURUSD][1]? Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

In 2020, the export-led euro area was going to find support from China, which had surprisingly escaped a large-scale pandemic. In 2021, Europe counted on the US economy, supported by massive fiscal stimulus. But what if there is a conflict between the two countries? The euro area could lose support from both of them.

As the events of 2018-2019 showed, a trade war between the world’s largest economies is not the best time for the euro. In 2021, the conflict flares up over Taiwan. China regards Taiwan as a breakaway province which it has vowed to retake, by force if necessary. The United States intends to defend the independence of Taipei in every possible way. At the same time, Washington behaves rather strangely: it strengthens economic ties with Taiwan but threatens to label it as a currency manipulator, which leads to a weakening of the Taiwan dollar. Nonetheless, China, according to Bloomberg’s source familiar with the matter, will avoid receiving a black mark from Janet Yellen, which will strengthen the yuan and support the [EURUSD][1].

Dynamics of yuan and euro

Source : Trading Economics

Geopolitical conflicts escalation usually leads to greenback strengthening as the demand for safe-haven assets increases. The demand for US Treasury bonds also grows.

In the first six months of this fiscal year, the US budget deficit reached $ 1.7 trillion, twice as much as in the same period a year earlier. The US desperately needs money, especially as Republicans oppose Joe Biden’s plan to fund a new fiscal stimulus package by raising corporate taxes. Thus, it is beneficial for the USA to maintain a high degree of geopolitical tensions in Asia, the Middle East, and in relations with Russia, as foreign investors will be encouraged to buy Treasuries. The US Treasury department managed to profitably place 3, 10, and 30-year securities at auctions at the beginning of the week ending April 16.

Expectations of an increase in the bonds supply in the secondary market and concerns about the US inflation surge contributed to the Treasury yields rally resumption. Therefore, the stock indexes were pressed down, discouraging the [EURUSD][1] bulls. According to the research by the Federal Reserve Bank of New York, inflation expectations among consumers for the next year are 3.2%; in 3 years, the expected inflation should reach 3.1%, which is the highest level since March 2014 and does not fit with the Fed’s opinion on the temporary CPI acceleration. About 45% of respondents believe that inflation will exceed 4%.

Dynamics of inflation expectations

Source : Bloomberg

Rising commodity prices, supply chain disruptions, huge deferred demand, and high inflationary expectations are powerful drivers for CPI growth. Bloomberg experts suggest that the US inflation rate should increase from 1.7% to 2.4% in March, which seems to be just the beginning.

Weekly [EURUSD][1] trading plan

The Forex outlook depends on the dollar pairs’ reaction to the release of the US inflation data. If the CPI is higher than the consensus forecast, the Treasury yields rally is likely to continue. This scenario suggests the [EURUSD][1] should go down below the supports at 1.187 and 1.185, which could send the pair to 1.18 and 1.176. Conversely, a weak reading of the US inflation will suggest that the euro could return to a level above $1.193.

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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