FUNDAMENTAL EURO FORECAST: BULLISH

• The advance in EUR/USD that began on May 5, when the pair was briefly below 1.20, and has taken it well above 1.22 to its highest since January 8, looks set to continue in the days ahead.
• A tightening of US monetary policy is both expected and still many months away so talk of it is unlikely to boost the US Dollar much further, if at all.
• Moreover, Eurozone economic data are improving and coronavirus cases are starting to fall sharply; both positive for EUR/USD, which is therefore well placed to reach 1.23 and even the year-to-date high of 1.2349 touched on January 6.

MORE EURO PRICE GAINS LIKELY

EUR/USD reached its highest level since January 8 last week and from a fundamental perspective there is now little to stop it breaching the 1.23 level and challenging the 1.2349 year-to-date high touched on January 6.

EUR/USD PRICE CHART, DAILY TIMEFRAME (DECEMBER 15, 2020 – MAY 27, 2021)

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

The main argument against further strength for the pair is that a tightening of US monetary policy is on the way. Note, though, that any such move is still many months away and has, anyway, been largely priced in by the markets.

Moreover, while members of the European Central Bank’s policy-setting Governing Council have been sounding less hawkish recently, the forward-looking Eurozone economic data have been improving. Germany’s Ifo business climate indicator, for example, came in above expectations last week, and so did the institute’s expectations index.

Source: DailyFX economic calendar

Coronavirus cases in the region are falling sharply too after the slow start to the EU’s vaccination program, as can been in the charts below for Europe as a whole.

Source: Reuters

This could all mean more gains for EUR/USD, although perhaps not until after the next ECB monetary policy meeting in Frankfurt on June 10.

WEEK AHEAD: EUROZONE INFLATION

Turning to the week ahead, the key regional data releases will be German inflation Monday and Eurozone inflation Tuesday. The preliminary year/year figure for Germany is expected by economists to increase to 2.3% in May from 2.0% in April, while Eurozone inflation is predicted to climb to 1.9% from 1.6%.

Even if ECB officials continue to insist that price rises will be temporary and therefore not a problem, such numbers could still persuade some in the markets that the ECB will be forced to respond by taking away the punchbowl sooner than currently expected – benefiting the Euro accordingly.