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Euro Forecast: EUR/USD Outlook Bleak as Traders Rush for US Dollars

Fundamental Euro Forecast: Bearish

  • Traders have become addicted to the US Dollar as a high US vaccination rate, the prospect of a strong economic recovery and the likelihood that the Federal Reserve will start to tighten monetary policy soon make it their currency of choice.
  • That is bad news for EUR/USD, with the Eurozone seen as lagging behind on vaccinations, an economic recovery seen as still far away and another interest rate cut still a possibility.
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Euro price at risk of further falls

Last Thursday’s drop in EUR/USD below 1.20 for the first time since December 1, 2020 was highly significant not just technically but also psychologically. It provided a stark reminder to traders that the Eurozone is lagging far behind the US (and the UK) in vaccinating its citizens against coronavirus and that any economic recovery will therefore likely lag behind too.

EUR/USD Price Chart, Daily Timeframe (July 3, 2020 – February 4, 2021)

EUR/USD Chart

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

In recent months, the US Dollar has become the markets’ favorite safe haven but when the global economic recovery arrives it could well prove to be the leader on the way up too. As mentioned earlier, traders are confident that the currencies of countries that are ahead in vaccinating their citizens against the coronavirus, like the US and the UK, will be the first to recover economically from the slump caused by the pandemic.

That means central banks like the Federal Reserve and the Bank of England will also be the first to begin tightening monetary policy, perhaps while the European Central Bank is still considering a rate cut to boost activity.

This is all bad news for EUR/USD, which is now back to where the ECB would prefer it to be and could conceivably drop to the lows around 1.16 last seen in early November – though not, of course, in the short-term.

Week ahead: German inflation, trade and industrial production

Turning to the data in the week ahead, there is little market-moving on the agenda. The highlight could be Wednesday’s final German inflation data for January, expected to show a rise to 1.0% year/year after the previous 0.3% fall. Otherwise, German and Eurozone industrial production and German trade figures are on the calendar too.

Change in Longs Shorts OI
Daily-29%4%-13%
Weekly23%-3%7%

Unsure how interest rates affect the FX market? There’s an explainer here

We look at currencies regularly in the DailyFX Trading Global Markets Decoded podcasts that you can find here on Apple or wherever you go for your podcasts

— Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex