Fundamental Euro Forecast: Bullish
- EUR/USD has advanced from a low of 1.0778 on February 20 – its weakest level since April 2017 – to a high above 1.12 last week.
- Towards the end of the week the rally looked to be running out of momentum and a cut in Eurozone interest rates is almost certain this coming Thursday.
- However, further EUR/USD strength still seems likely as speculation grows that the Federal Reserve will cut US rates again on March 18.
Euro price to strengthen further?
The financial markets are almost certain the European Central Bank’s Governing Council will cut the Eurozone’s benchmark deposit rate to -0.6% from -0.5% this coming Thursday. However, such a move would be unlikely to curb the recent strength of EUR/USD unless the ECB combined it with other action to ease monetary policy.
Towards the end of last week, the overnight index swaps market was implying a probability of more than 96% that the ECB would lower the deposit rate deeper into negative territory in an attempt to combat a weak economy and the likely impact of the coronavirus outbreak.
However, the markets are also becoming increasingly open to the possibility that the Federal Reserve, after its emergency half-point reduction in the Fed funds rate last week, could cut it again on March 18. In fact, Fed futures seem convinced, pricing in a two-thirds chance of a 25 basis points reduction, a one-third chance of another 50 bps reduction and no chance at all of rates being left where they are.
Moreover, the pause in the EUR/USD advance can be read as simply a pause for breath before further gains.
EURUSD Price Chart, Daily Timeframe (October 15, 2019 – March 5, 2020)
Chart by IG (You can click on it for a larger image)
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of clients are net long. of clients are net short.
Week ahead: German industrial production, trade and final CPI data
With attention so firmly focused on interest rates and the likely knock to global growth from the Covid-19 coronavirus outbreak, little reaction is likely to the upcoming economic data. However, the numbers could still emphasize the ongoing weakness of the Eurozone economy and especially of its largest member, Germany. Its third largest, Italy, has also been one of the countries hit hardest by the virus’s spread.
German industrial production, trade and final inflation figures are all due, while data for the Eurozone as a whole will include industrial production, and revised GDP growth numbers for the fourth quarter of last year. Predicting changes to data already released is a fool’s game but, with the initial release showing Eurozone economic expansion at just 0.1% quarter/quarter and a meagre 0.9% year/year, any downward revision would be poorly received in the Euro markets.
Recommended by Martin Essex, MSTA
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— Written by Martin Essex, Analyst and Editor
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