Euro Forecast: EUR/USD Outlook Bleak on Lockdowns, Third Wave Fears

FUNDAMENTAL EURO FORECAST: BEARISH

• EUR/USD has already dropped to its lowest levels since November last year and is sure to rally at some point but for now it’s hard to see anything but more losses.
• The EU is struggling with a third wave of Covid-19 infections, is still facing problems with its vaccination program and is strengthening its lockdown measures.
• That’s likely to mean a slower economic recovery than elsewhere and therefore continuing currency weakness.

EURO PRICE MAY STILL FALL FURTHER

EUR/USD has already fallen a long way from the recent highs around 1.2350 reached in early January this year, and the time when the European Central Bank was concerned about the strength of the Euro above 1.20 already seems like a distant memory.

A rally could take place any time now but the trend remains lower as a third wave of coronavirus infections hits EU countries, more lockdowns are imposed and the bloc continues to struggle with its vaccinations program. Indeed, not only is there no end in sight to the pandemic restrictions but it looks currently as though they could even be tightened and extended.

That means the EU economy will likely recover later and less strongly from the global pandemic-induced slump than other countries and regions, that ECB interest rates will rise later than others and that the currency will continue to weaken.

EUR/USD PRICE CHART, DAILY TIMEFRAME (SEPTEMBER 28, 2020 – MARCH 25, 2021)

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

Note that even a set of strong ‘flash’ purchasing managers’ indexes for the Eurozone in March released last week failed to lift the currency; a sure sign that sellers of EUR/USD have the upper hand, especially at a time of risk aversion, rising sovereign bond yields and increasing concerns about inflation down the road.

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WEEK AHEAD: A TEST FOR EUR/USD SENTIMENT

On the subject of economic data, the coming week will again test the patience of any remaining EUR/USD bulls, with a raft of numbers due. The most important will perhaps be inflation data for Germany, France and then the Eurozone as a whole, with analysts predicting a rise in the headline rate for the bloc to 1.2% year/year in March from 0.9% in February. If that comes in below expectations, it could add to the selling pressure.

Other figures due include confidence data, German unemployment and retail sales, and final manufacturing PMIs ahead of the US non-farm payrolls numbers at the end of the week.

— Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex