The EUR / USD outlook turns bearish again
Fundamental Euro Forecast: Bearish
- EUR / USD risks resuming its downtrend as ECB President Lagarde reiterates that eurozone interest rates will not be hiked anytime soon.
- While many other major central banks are also pushing back market prices for rate hikes, the lower yield on eurozone bonds makes the euro particularly unattractive.
EUR / USD price outlook worsens
So much for the prospects for a brightening up of the euro. The first half of last week saw EUR / USD on the rise, but the direction reversed on Thursday and now the outlook has turned darker again with the pair’s long-term downtrend likely to pick up.
As always, interest rate expectations are key here. European Central Bank President Christine Lagarde’s accommodating comments on euro area monetary policy the previous week have been largely ignored. But if we learned anything from the Federal Reserve and Bank of England meetings last week, it’s that large central banks are generally more accommodating than markets.
First, US Federal Reserve Chairman Jerome Powell thpointed out that the end of bond purchases Is does not mean a rush to raise interest rates.Then the Bank of England baffled the markets by keeping the UK’s discount rate at 0.1% rather than increasing it to 0.25% that the markets had taken in.
So even though the Fed has refrained from using the word “transient” to describe inflation, it seems that the major central banks still believe that inflation will rise further but then fall back, negating the need for inflation. ‘a rate hike.
Against this backdrop, markets were more inclined to believe Lagarde when she was conciliatory again last week. The ECB is highly unlikely to raise interest rates next year as inflation remains too low, she said, and the euro has fallen as this time the markets have realized that the rise expected as early as next October may in fact not materialize.
EUR / USD price table, daily period (May 25 – November 4, 2021)
Source: IG (You can click on it for a larger image)
That said, if so many major central banks are contesting market prices for interest rate hikes, why should the euro suffer more than the US dollar or the pound sterling? The simplest explanation is bond yields, with the benchmark 10-year German Bund yielding minus 0.2255% at the time of writing, compared to positive returns of 0.943% for the 10-year UK Gilt and 1.531% for the 10-year US Treasury bill. .
For a portfolio manager, the negative income of German Bunds is clearly a drag on their purchase, unless prices are expected to rise. Against this backdrop, it will be interesting to see the level of demand for 10-year Bunds auctioned on Wednesday in what could be the most important event of the week for Euro traders.
Fall of German ZEW announced
As for the economic data, there is little evidence on the ground this coming week, with the German ZEW Economic Sentiment Index for November arguably the highlight. Analysts polled by news agencies predict a decline to 19 from October 22.3, suggesting that economic optimism for the next six months has faded – potentially another negative factor for the beleaguered euro area currency .
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— Written by Martin Essex, Analyst
Do not hesitate to contact me on Twitter @MartinSEssex