Euro Q1 2022 Fundamental and Technical Forecasts

[MongiIG]

Euro Q1 2022 Fundamental Forecast: Still No Rate Hike, Still No Euro Recovery

After dropping almost continuously for more than six months, you might think that EUR/USD is overdue a substantial rally. The problem is that it remains almost impossible to imagine a catalyst for such a sustained move higher. The bottom line is that interest rates are being increased elsewhere but not in the Eurozone, and that points to further Euro weakness.

Now, nothing is certain in the world of central banking but the forward guidance from the European Central Bank suggests that early in 2022 it will reduce bond buying via its Pandemic Emergency Purchase Program and perhaps balance that by increasing buying via its older Asset Purchase Program: essentially making no change in monetary policy overall.

Later in the year though, perhaps in the second quarter, the ECB will begin cutting its monthly asset purchases until by year-end the programs end completely. This indirect tightening of monetary policy could then be followed by an interest rate increase early in 2023. This is, of course, no certainty, and the ECB is not a great communicator with the markets. However, it’s a scenario that would leave the ECB way behind many other central banks in raising rates and would therefore likely lead to more losses for the Euro.

EUR/USD PRICE CHART, DAILY TIMEFRAME (MAY 9 – DECEMBER 8, 2021)

Source: IG

EUROZONE INFLATION OF PARAMOUNT IMPORTANCE

That said, this all assumes that inflation will rise further but then fall back gradually; allowing the ECB to see through the initial increase to the reduction coming later. In other words, not having to panic by hiking rates only to have to cut them afterwards. This is indeed a likely outcome. An increase in German Value Added Tax and previous energy price rises will both drop out of the inflation calculations, and supply-chain disruptions caused by the coronavirus pandemic will hopefully end, bringing prices down.

On the other hand, if the Eurozone economy continues to recover then prices generally could start to rise and utility prices in particular could advance as green energy takes over from cheaper fossil-fuel energy. Note too that German Bund yields remain negative while yields in countries like the US and the UK are well above zero – giving the Euro an inbuilt disadvantage compared with currencies such as the US Dollar and the British Pound.

INTEREST RATE DISADVANTAGE FOR EURO INVESTORS

The interest rate increases expected by central banks such as the US Federal Reserve and the Bank of England can only worsen that disadvantage and boost the Dollar and the Pound against the Euro.

This all assumes, though, that the global economy continues to recover from the Covid-19 pandemic, which in turn assumes that no new variants emerge that force governments to clamp down again by restricting travel, enforcing more lockdowns and generally taking measures that would stifle growth. If that were to happen then tighter monetary policy elsewhere would become less likely and the Euro would suffer less against other currencies.

One additional unknown is whether the new German government coalition of social democrats, liberal democrats and greens will loosen fiscal policy to such an extent that the ECB would be forced to react by tightening monetary policy to balance out economic policy overall. That is so unlikely, though, that traders can almost certainly ignore it.

By Martin Essex, MSTA, Analyst, 24th December 2021. DailyFX

[MongiIG]

EUR Q1 2022 Technical Forecast: The Path of Least Resistance is Lower

TECHNICAL SIGNALS REMAIN BEARISH FOR THE EURO

The Euro suffered significant losses against the U.S. dollar in 2021. Although trading was wobbly and largely directionless for the first five months of the year, the journey lower was relentless from June onwards. The exchange rate fell from ~1.2250 to the ~1.1200 area as the ECB remained relatively dovish and the Fed took the first major steps towards policy normalization. During this time, EUR/USD broke below its 50-day, 100-day, and 200-day moving average decisively, establishing lower highs and lower lows impeccably, a bearish sign according to technical analysis.

The daily chart below shows that the Euro’s pullback was guided by a flawless descending trendline extended from the May high. This line was tested on several occasions, repelling rally attempts, and consistently pushing the price lower. Over the near term, this trendline should continue to act as a solid dynamic resistance.

For the first quarter of 2022, the technical signals remain overwhelmingly negative for the common currency, so a meaningful rebound seems a distant prospect. As such, the path with the fewest hurdles continues to be downwards, but for bearish momentum to gather steam and catalyze the next leg lower, the recent consolidation must end and lead to a decisive move below the 1.1200/1.1160 support area. If the exchange rate falls below this floor, sellers may become emboldened to drive the pair towards the 1.1000 psychological level, an area that hasn’t been tested since May 2020.

In the event of a bullish reversal, EUR/USD must overcome many obstacles before the technical picture begins to improve, with the first barrier at 1.1370/1.1385. If bulls reassert themselves and manage to propel the price above this ceiling, trendline resistance near 1.1500 would come into focus, followed by 1.1690, the October high. In any case, for a long-term bullish trend to develop, EUR/USD must overtake its 200-day moving average, a far-fetched scenario at this point.

From a fundamental standpoint, there is reason to believe that the U.S. dollar can outshine the Euro in the coming months. One obvious tailwind for the greenback is monetary policy divergence between the Federal Reserve and the European Central Bank. For example, while the Fed is poised to raise interest rates three times in 2022 to counter inflationary pressures, the ECB is unlikely to increase borrowing costs in the upcoming year. For a more comprehensive fundamental analysis, however, please refer to the first part of this guide.

EUR/USD DAILY CHART

Chart created using TradingView

 

By Diego Colman, Market Analyst, 24th December 2021. DailyFX

[RCtrader]

Thank you so much gentlemen for both the technical and the fundamental aspects of the euro and the dollar. There is a lot of data I was already acquainted with, but it's convenient to have it reinforced. It appears the euro holds the ground in the 1.1200 - 1.1390 area. I wouldn't mind it hovering in the area for another 3 months. 😉

[MongiIG]

On 08/01/2022 at 21:55, RCtrader said:

It appears the euro holds the ground in the 1.1200 - 1.1390 area. I wouldn't mind it hovering in the area for another 3 months. 😉

EUR/USD Technical Analysis

EUR/USD remains in the 1.11861 and 1.13860 range that it has been in since November last year. These levels may continue provide support and resistance respectively. That low at 1.11861 is just above the June 2020 low of 1.11850.

However, we are starting to see higher lows as the price bumps up against the upper side of the trading band. These lows at 1.12738, 1.12347 and 1.12219 might provide support.

The short term simple moving averages (SMA) remain just below the price and the 10, 21 and 34-day SMAs have all just acquired a positive gradient. This could suggest that there is short-term bullish momentum evolving.

The 55-day SMA at 1.13688 and the 100-day SMA at 1.15192 may offer resistance.

Potential resistance could be at the previous highs and pivot points at 1.13830, 1.13865, 1.15133, 1.16694 and 1.16922.

Chart created in TradingView

 

Written by Daniel McCarthy, Strategist for DailyFX.com. 10th Jan 2022