FUNDAMENTAL EURO FORECAST: BEARISH

• Coronavirus fears and a strong US Dollar are continuing to pummel the Euro.
• Wrangling over the EU Budget and growing rate-cut speculation are also undermining it, suggesting no end in sight for its current weakness.

EURO’ DECLINE TO CONTINUE

After the persistent and prolonged slide in EUR/USD, particularly since the start of this month, a correction is becoming increasingly likely. However, there are so many reasons why the Euro should weaken that any bounce will likely be short-lived and shallow.

EURUSD PRICE CHART, DAILY TIMEFRAME (NOVEMBER 22, 2019 – FEBRUARY 20, 2020)

Chart by IG

EUR/USDBULLISH

Data provided by

At the top of the list are coronavirus worries and the strength of the US Dollar that are affecting many other currencies such as the Australian Dollar and the New Zealand Dollar. However, wrangling has also begun over the European Union’s new seven-year budget, with rifts emerging already between those countries that contribute and those that benefit; particularly as Brexit has left a hole of around £7 billion in the EU’s finances.

For Euro traders, this is something that can be ignored for now but it is hardly a propitious background. More importantly, Eurozone economic weakness and the possible economic impact of the coronavirus outbreak have increased speculation that the European Central Bank may cut its benchmark interest rate by another 10 basis points from the current -0.5% before the year-end. Currently the overnight index swaps market is suggesting around a 60% chance of such a reduction by end-2020.

As the minutes of the January meeting of the ECB’s Governing Council showed last week, policymakers were turning cautiously optimistic about growth prospects last month but that was before news broke of the coronavirus outbreak. Similarly, news of an unexpected bounce in Eurozone consumer confidence this month was positive for the Euro but not a game-changer.

WEEK AHEAD: IFO, GDP, INFLATION AND JOBS

As for the week ahead, that is packed with data and arguably the most important indication of how the Eurozone economy is holding up will come from Monday’s Ifo business climate index for Germany, the region’s largest economy. Analysts polled by the Reuters news agency are predicting a drop to 95.1 in February from 95.9 in January and if the fall is any larger than that the Euro bears could emerge in force.

ECB President Christine Lagarde is also due to speak at a conference that day and her words will need to be listened to carefully for any signal that she and her team are less optimistic now than they were last month.

GDP growth data for the fourth quarter of last year from Germany on Tuesday and France on Friday are final figures, and backward-looking anyway, so less likely to have an impact. However, German employment and particularly inflation numbers for February, due Friday, will be even more important than usual now the focus is turning again to the outlook for monetary policy.