FUNDAMENTAL EURO FORECAST: MIXED

• The European Central Bank left all its monetary policy settings unchanged last week and its president, Christine Lagarde, said little new at her virtual press conference after the decision.
• That, unsurprisingly, left the Euro unmoved and the outlook as it was.
• Significantly, though, EUR/USD now looks to have broken to the upside after its falls earlier this month while EUR/GBP has broken to the downside: trends that will both likely continue in the week ahead.

EURO WELL PLACED TO GAIN AGAINST THE US DOLLAR

The broad risk-on move in the financial markets looks set to continue in the week ahead as optimism rises that US President Joe Biden will be able to push all or most of his stimulus program through Congress, that there will be an orderly transition of power in the US, and that the coronavirus vaccine rollout globally will boost economic growth.

As ever, that will likely mean a flow of money out of the safe-haven US Dollar into other currencies, including both the Euro and the British Pound. This continues to be a worry for the European Central Bank, which has made clear that it does not want the Euro to strengthen.

A comment that it will “continue to monitor developments in the exchange rate” was left out of its statement issued after it left all its monetary policy settings unchanged last Thursday but any thoughts that this marked a significant change were revised when the comment was included in ECB President Christine Lagarde’s statement opening her post-decision virtual news conference.

EUR/USD will therefore likely continue to rise, with the chart below showing a break higher from the minor downward trend that began on January 7.

EUR/USD PRICE CHART, DAILY TIMEFRAME (JULY 27, 2020 – JANUARY 21, 2021)

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

However, the Euro continues to underperform other currencies and, while EUR/USD has broken higher, EUR/GBP has broken lower and that too is a trend that will likely continue.

EUR/GBP PRICE CHART, DAILY TIMEFRAME (MAY 18, 2020 – JANUARY 21, 2021)

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

In fact, while traders will inevitably concentrate on EUR/USD, the world’s most traded currency pair, the Euro has been losing ground not just against Sterling but against other currencies generally, so traders bullish EUR/USD will need to be cautious when trading Euro crosses in the days ahead.

EURO TRADE-WEIGHTED INDEX CHART (OCTOBER 20, 2020 – JANUARY 21, 2021)

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

WEEK AHEAD: GERMAN IFO, INFLATION, UNEMPLOYMENT AND GDP

Turning to the economic data in the week ahead, it is a big week for German statistics, beginning with the Ifo index Monday, although that is expected to be little changed in January from the month before. Inflation figures Thursday will be the next focus of attention, with analysts forecasting a rise to 0.7% year/year in January, up from minus 0.3% the month before. Consumer confidence, unemployment and the “flash” measure of GDP in the fourth quarter are also on the economic calendar.