Euro is going ahead. Forecast as of 02.08.2021

2021-08-02 2021-08-02 Euro is going ahead. Forecast as of 02.08.2021

Dmitri Demidenko

The divergence in the economic growth used to support the EURUSD bears. However, much has changed in the second quarter. The euro trend will depend on whether the euro-area economy will continue expanding as fast as it does now. Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

The idea to sell the fact, strong reports on the euro-area GDP and inflation, has worked out. The EURUSD hasn’t consolidated above the bottom of figure 19. However, there was something in the market reaction and in the reports that made me doubt the bullish outlook for the US dollar. By the end of the week through July 27, speculators increased dollar net longs to the highest level since March 2020. Naturally, exiting the trades after the FOMC meeting resulted in a rapid rally of the euro against the dollar. By the end of the month, some hedge funds could simply have taken profits from the long positions.

In April-June, the euro-area economy expanded by 2%, surpassing the US and Chinese GDPs for the first time since at least the beginning of the pandemic. Compared to the previous quarter, the US GDP grew by 1.6%, and China’s GDP – by 1.3%. At the same time, the spread of the Delta and a sharp decrease in the rate of the vaccination company in the United States increase the risks that the divergence in economic growth in July-September will be an advantage for the EURUSD bulls. The proportion of the fully vaccinated population in the EU is still lower than in the United States (48.6% versus 49.5%), but for those who received at least one dose, the situation is the opposite (58.8% versus 57.6%).

Dynamics of European GDPs

Source: Bloomberg.

Dynamics of vaccinations in USA, EU, and UK

Source: Nordea Markets

In January-March, a slower vaccination campaign in the EU than in the USA sent the EURUSD down to the bottom of figure 17. However, the market turned optimistic, the EU started to catch up with the USA, and the pair was up to 1.225. Will the euro bulls restore the uptrend amid the successful vaccination in the euro area and the divergence in the economic growth? Should sellers turn into buyers?

In my opinion, the most important variable in the equation has changed. I mean the Fed’s position. Until mid-June, the central bank was patient with the inflation acceleration. I would say overly patient. Next, the Fed signaled a possible rate hike in 2022, which lured investors back to the US dollar. In July, Jerome Powell showed no fear of the Delta and opened the door for monetary policy normalization.

The Fed is acting according to plan, and it is moving faster than the ECB. According to the consensus forecast of primary dealers, the Fed will start tapering the QE in the first quarter of 2022 and finish in the fourth. The EURUSD will resume falling if the process of withdrawing monetary stimulus is accelerated. And this requires inflation to remain higher than the target longer than the Fed suggests, and the labor market should recover faster than the central bank forecasts.

Weekly EURUSD trading plan

The bet on the US employment growth could work out already in early August. According to Reuters experts, the July indicator will grow by 926,000, the unemployment rate will decrease from 5.9% to 5.7%, and the average wage will grow by 3.6% Y-o-Y. Strong numbers, the expectations of which can press down the EURUSD on the eve of an important release and become the reason to enter shorts on the breakout of the support at 1.1845-1.185. However, I do not rule out that the pair will enter consolidation ahead of such an important event as the US jobs report.

Price chart of EURUSD in real time mode

Source: https://www.liteforex.com/blog/analysts-opinions/euro-is-going-ahead-forecast-as-of-02082021/