Fundamental forecast for the euro: bearish
- One after another, hardliners on the Governing Council of the European Central Bank warned last week that monetary policy in the eurozone will need to be tightened.
- However, it is almost certain that they will be outnumbered by pigeons at this week’s council meeting and that politics will remain exactly where it is, with no forewarning of a property cut likely first at the end of this year.
Risk of falling price of the euro
Governing Council of the European Central Bank will almost certainly decide this week not to announce a tightening of monetary policy in the euro zone, although several hardline Council members suggested last week that it should. Given that many EUR / USD traders may have taken long positions on the pair due to aggressive rhetoric, the main risk is that it will pull back following the announcement of the Council’s policy decision on Thursday.
re were almost too many hawks in the news to name, but among them were ECB Vice President Luis de Guingos, Bundesbank President Jens Weidmann and other members of the Council. Robert Holzmann and Klaas Knot. Everyone is concerned about a rebound in the eurozone economy coupled with a sharp rise in inflation to 3%, well above the ECB’s target.
However, the pigeons led by President Christine Lagarde will almost certainly retain a majority on the Council, insisting that exceeding the inflation target will be temporary and that there should be no sign of future policy tightening yet. You might also note in passing that last week’s data showed a surprisingly large drop in the final August reading of the Eurozone Services PMI and an unexpected drop in year-on-year German retail sales in July. This, of course, would be bearish for EUR / USD, especially as it has been advancing strongly since hitting a low of 1.1664 on August 20.
EUR / USD price chart, daily time frame (Jan 4 – Sep 3, 2021)
Source: IG (You can click on it to see a larger image)
Lagarde has a chance to explain her thoughts at Thursday’s post-announcement press conference, but there’s also something else traders need to pay attention to: the ECB’s economic projections. Dy Guindos was informed by the Spanish newspaper El Confidenzialela last week to say that in the Eurozone “the economy is doing better in 2021 than we expected, and this will be reflected in the projections that will be published in the coming days.”
If the projections do indeed suggest strong growth and inflation, that could give the EUR / USD bulls some hope and perhaps limit the slide.
re will be no rate hikes in the euro zone until 2024
Going forward, it could be later this year before the ECB announces to cut property purchases on the inside, possibly involving a move out of its own Pandemic Emergency Purchase Program into its EA Asset Purchase Program. global purchases. Furthermore, the ECB is likely to end its QE program very slowly and that an initial interest rate hike could be a long way off in 2024.
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– Written by Martin Essex, Analyst
Feel free to contact me at @MartinSEssex
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