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Fundamental Euro Forecast: Neutral
- The European Central Bank’s Governing Council meets this coming week and its statement Thursday, followed by its President’s news conference, will likely be important in determining the Euro’s direction over the next month or so.
- The ECB will leave all its monetary settings unchanged but President Christine Lagarde could well start preparing the markets for a further easing of monetary policy in December.
- Meanwhile, there are few signs of a breakout from the broad 1.16 to 1.20 range for EUR/USD that has confined the pair since mid-July.
ECB Meeting Critical for EUR/USD
The statement Thursday at the end of the next meeting of the European Central Bank’s Governing Council, and the subsequent comments by ECB President Christine Lagarde at her news conference, will be critical in determining the future direction of the Euro.
There will be no changes in interest rates or Eurozone monetary policy this coming week but Lagarde could hint at a further policy easing as early as December – a move that could weaken EUR/USD and the Euro crosses. The problem is that the Governing Council seems split on the issue.
Some members seem willing to act, fearing a “double dip” in the Eurozone economy as GDP falls again after a brief respite, hit by a second wave of Covid-19 infections that forces more countries and regions into lockdown. Easier monetary policy might help alleviate the resulting economic impact, help lessen deflationary pressures in the Eurozone and offset any damage to the region’s trade caused by the Euro’s advance since EUR/USD hit a low under 1.07 in March.
Others, though, seem more circumspect, worried that after hitting its highest level for more than a month last week EUR/USD may be vulnerable to a setback. There may also be concern about hinting at easier monetary policy so close to the US Presidential election and that more wary view seems to be that of the markets, where pricing suggests the rate on the ECB’s deposit facility will be minus 0.6% by the end of next year, only marginally below the current minus 0.5%.
Putting all these factors together suggests that EUR/USD will continue to trade for a while yet in a broad range between the September 1 high at 1.2011 and the September 25 low at 1.1611.
EUR/USD Price Chart, Daily Timeframe (July 22 – October 22, 2020)
Source: Refinitiv (You can click on it for a larger image)
Week Ahead: Data Also Important for EUR/USD
Turning to the economic data on the calendar, the week ahead is a busy one, with German inflation and unemployment figures due Thursday, followed by Eurozone inflation and GDP numbers Friday. Both the German and the Eurozone price data could show steeper falls – emphasizing the ECB’s concerns about deflation – while the GDP data for the third quarter will likely show a strong rebound.
That would do little though to ease double dip concerns so more important might be Monday’s Ifo index of the German business climate in October, the first month of the fourth quarter, and it would be no surprise if that were weaker than in September.
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— Written by Martin Essex, Analyst
Feel free to contact me on Twitter @MartinSEssex