FUNDAMENTAL EURO FORECAST: NEUTRAL

• The US Dollar was undermined last week by weaker-than-expected US inflation data and bearish comments from Federal Reserve Chair Jerome Powell.
• That has put EUR/USD on firmer footing, and last week’s rally may very well continue into the week ahead.

EURO PRICE ON A FIRMER FOOTING

The US inflation figures released last Wednesday were certainly a surprise. They showed both the headline rate and the core rate at just 1.4% year-over-year rather than the 1.5% forecast by economists, and the core rate at zero month-over-month.

That surprise was followed swiftly by a distinctly dovish speech at the Economic Club of New York by Jerome Powell, who chairs the US Federal Reserve. He repeated that the Fed would not consider raising interest rates even if inflation exceeds 2% on a temporary basis. Moreover, the central bank would need to see “substantial progress” on its employment and inflation goals before any tapering of its $120 billion per month asset purchase program.

That undermined the so-called reflation trade, and therefore the US Dollar, as traders looked ahead to both US monetary policy and US fiscal policy remaining loose into the foreseeable future and to EUR/USD resuming the trend higher that has been in place since May 2020.

EUR/USD PRICE CHART, DAILY TIMEFRAME (APR. 30, 2020 – FEB. 11, 2021)

Source: IG (You can click on it for a larger image)

On the other side of the coin, the Winter 2021 Economic Forecast document from the European Commission, released Thursday, showed a reduction in the Eurozone growth forecast for 2021 to 3.8% from the 4.2% projected in the Fall, but it was otherwise optimistic.

The Eurozone and EU economies “are expected to reach their pre-crisis levels of output earlier than anticipated in the Autumn 2020 Economic Forecast, largely because of the stronger-than-expected growth momentum projected in the second half of 2021 and in 2022,” the Commission said.

That, too, should boost EUR/USD on the basis that a recovery from the downturn caused by the coronavirus pandemic would bring forward the day when the European Central Bank begins to consider tightening monetary policy. Vaccinations in the EU may be proceeding more slowly than in the US, but the Commission seemingly sees a reasonable recovery anyway.

WEEK AHEAD: ZEW, CONSUMER CONFIDENCE, AND PMIS

The strength of that recovery could be tested by some early February data due this week. First up is the ZEW index of German economic sentiment on Tuesday, followed by the flash measure of Eurozone consumer confidence on Thursday, as well as both manufacturing and service-sector purchasing managers’ indexes for the region on Friday.

However, as long as the figures don’t suggest a slower-than-expected economic improvement, EUR/USD should continue last week’s steady climb higher.