FUNDAMENTAL EURO FORECAST: BEARISH

Faced with a strong US Dollar on safe-haven demand and fears of a second wave of the coronavirus pandemic washing across Europe, the outlook for EUR/USD remains bearish even after its steep recent losses. (UUP, FXE)

A bounce will likely come soon as profit-takers realize their gains and bottom-fishers move in, but a substantial rally is still nowhere in sight.

EURO PRICE OUTLOOK BLEAK

The Euro has little going for it at present amid fears of a second wave of the COVID-19 pandemic sweeping across Europe and concerns that the nascent economic recovery in the Eurozone will be washed away. Adding to the downward pressure on the EUR/USD pair, the US Dollar continues to benefit from buying by risk-averse investors looking for a safe haven.

That said, no trend lasts for ever and a bounce will likely come soon even if a fully-fledged recovery remains far away.

EUR/USD PRICE CHART, DAILY TIMEFRAME (JUNE 24 – SEPTEMBER 24, 2020)

Source: Refinitiv 

As the chart above shows, the 20-day moving average looks close to crossing below the 50-dma and any such bearish crossover would confirm the downward momentum in the pair. There is near-term optimism though from the 14-day relative strength index, at the bottom of the chart, which is now below the 30 mark suggesting EUR/USD is currently oversold.

EUROZONE INFLATION IN FOCUS

As for the European Central Bank, its Chief Economist Philip Lane made clear last week that it has inflation clearly in its sights. “The baseline scenario in our staff projections indeed factors in that a medical solution [to the pandemic] is found over the course of next year,” he said, adding: “This would support a recovery in the service sector and put upward pressure on service-sector inflation.”

September inflation data due this week will therefore be significant, with numbers due Tuesday from Germany and Wednesday from France and then the Eurozone as a whole. In Germany, year/year inflation is widely expected to have remained at zero while in the Eurozone the ‘flash’ HICP measure could well stay at minus 0.2% – ensuring that ECB policy remains highly accommodative.

Note, though, that despite Lane’s comment market pricing suggests the ECB’s minus 0.5% deposit rate could still be close to that level at the end of next year – another negative for the Euro.