Currency Forecast EURUSD; Draghi’s Dire Predictions

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Currency Forecast EUR/USD; Draghi’s Dire Predictions

Draghi’s Warnings Tank Euro

Outgoing ECB Chief Mario Draghi did not produce additional stimulus at his final meeting but he did leave the bank and the EU with a warning. Ongoing weakness in global economies associated with but not limited to impacts from the U.S./China trade war threaten EU stability. If further actions are not take it is possible the EU could see prolonged and protracted weakening, especially in the pillar-economy of Germany. Germany is already on the brink of recession, a tip in the wrong direction could have far-reaching repercussions for the EU and the world.

The incoming data since the last governing council meeting in early September confirm our previous assessment of a protracted weakness in the euro area growth dynamics, the persistence of prominent downside risk and muted inflation pressure”

The EUR/USD had been trading higher before the comments. The ECB’s lack of policy change coupled with a high-probability FOMC rate cut next week was driving the move. The comments undermined any hope of bullishness for euro traders because it virtually assures Christine Lagarde will follow-through on Draghi’s plans. The pair is now in retreat and likely heading to the 1.1050 level and the short-term moving average. The moving average will likely provide support until next Wednesday afternoon at which time the FOMC will take control of the market.

The longer-term outlook for the pair is range bound. The FOMC is largely expected to cut rates at the next meeting but the outlook for future cuts is still cloudy. No member of the committee is in favor of aggressive cutting and most think the “mid-cycle adjustment” is over. The risk for traders today is whether or not the FOMC’s outlook has changed. It is possible the committee could preemptively cut by 50 bps instead of the expected 25, they may instead indicate future cuts are needed, they may even decide that “wait and see” is still the way to go. It’s all up in the air.

The extreme-peak formed on the daily chart suggests the recent high will be tested again. The caveat is that support at the low end of the newly established range could easily be tested again before that happens. The indicators are consistent with a peak, we’ll have to wait on the FOMC to see if there is another bullish wave waiting to crash or if the bears will take over the market. A move below the EMA with a close AFTER the FOMC meeting will be bearish. Until then I’d use the EMA as a take-profit target for bearish trades and possible entry point for bullish.

EUR/USD Forecast Poll

EUR/USD: Back in the bearish path amid blindfold dollar’s demand

  • The US lost 701K jobs in March, the unemployment rate soared to 4.4%.
  • Central banks remained side-lined, but hints from policymakers will be out next week.
  • EUR/USD at risk of retesting and breaking the yearly low as soon as next week.

Read Full Analysis

The FXStreet Forecast Poll about EUR/USD (Euro US Dollar) is a sentiment tool that highlights our selected experts’ near and medium term mood and calculates trends according to Friday’s 15:00 GMT price.

How to Read the Forecast Poll charts

Overview

This chart informs about the average forecast prices, and also how close (or far apart) sit the numbers from all participants surveyed that week. The bigger a bubble on the chart means more participants targeting a certain price level in that particular time horizon. This distribution also tells if there is unanimity (or disparity) among participants.

Each participant’s bias is calculated automatically based on the week’s close price and recent volatility. Drawing from those results, this chart calculates the distribution of bullish, bearish, and sideways forecast prices from all participants, informing about sentiment extremes, as well levels of indecision reflected in the number of “sideways”.

Averages

By displaying three central tendency measures (mean, median, and mode), you can know if the average forecast is being skewed by any outlier among the poll participants.

shifted price

In this chart, the close price is shifted behind so it corresponds to the date when the price for that week was forecasted. This enables the comparison between the average forecast price and the effective close price.

price change

This chart tracks the percentage change between the close prices. Bouts of volatility (or extreme flat volatility) can be then compared to the typical outcome expressed through the averages.

smooth average

This measure is basically an arithmetical average of the three central tendency measures (mean, median, and mode). It smooths the typical outcome eliminating any possible noise caused by outliers.

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min/max

Together with the close price, this chart displays the minimum and maximum forecast prices collected among individual participants. The result is a price corridor, usually enveloping the weekly close price from above and below, and serves as a measure of volatility.

WHAT IS THE FORECAST POLL AND WHY TO USE IT?

The Forecast Poll is a sentiment tool that highlights near and medium-term price expectations from leading market experts. It is a sentiment indicator which delivers actionable price levels, not merely “mood” or “positioning” indications. Traders can check if there is unanimity among the surveyed experts – if there is excessive speculator sentiment driving a market – or if there are divergences among them. When sentiment is not at extremes, traders get actionable price targets to trade upon. When there is a deviation between actual market rate and value reflected in forecasted rate, there is usually an opportunity to enter the market.

You can also use the Outlook Poll for contrarian thinking strategies. Gonçalo Moreira, Research expert at FXStreet, explains: “People involuntarily follow the impulses of the crowd. Sentiment indicators, in turn, lead to ‘contrarian’ thinking. The Di helps traders detect sentiment extremes and thereby limit their eventual toxic herd behavior.” Read more on Contrarian Approaches with Sentiment indicators

HOW TO READ THE GRAPHS?

Besides the table with all participants’ individual predict, a graphic representation aggregates and visualizes the data: the Bullish/Bearish/Sideways line shows the percentage of our contributors on each of these outlook biases.

This graph is available for each time horizon (1 week, 1 month, 1 quarter). We also indicate the average price predict as well as the average bias.

2020 FORECAST FOR EUR/USD

In our EUR/USD Price Forecast 2020, our dedicated contributors expect the bearish trend to slow down during the year. By the end of the year 2020, the average outlook for the pair was 1,1186. Read more details about the forecast.

From July 2020 to Jan 2020, the maximum level for the EUR/USD (Euro US Dollar) was 1.1280 (on 10/08/19), and the minimum, 1.0896 (on 30/09/19).

MOST INFLUENTIAL POLITICAL EVENTS IN 2020 FOR EUR/USD

2020 should be the year of change or at least, the year when things begin to change. The recent trade deals hint some relief in the trade war front, hence in growth’s concerns. Economic developments and central banks’ decisions will motorize action throughout the first half of the year. In November 2020, the US will go to the polls. That grants a shaky year-end in the financial world. Will Trump be able to retain its chair?

BONDS THAT INFLUENCE THE MOST EUR/USD

Bonds whose moves can impact the EUR/USD: T-BOND 30y; T-NOTE 10y. This group also includes the following currency pairs: GBP/USD, USD/JPY, AUD/USD, NZD/USD, USD/CAD, EUR/GBP and USD/CHF

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Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any doubts.

Euro To US Dollar Exchange Rate Predictions: EUR/USD Tipped At $1.17 By Mid 2020

EUR/USD FORECAST UPDATE: Despite drifting lower into Friday’s session, the Euro to US Dollar exchange rate appeared set to secure its largest weekly gains of the year thus far with the single currency last seen trading at $1.12686, up 0.89% on the week.

Thursday’s session saw Draghi fail to out-dove markets or the Fed, only noting that ECB policymakers had discussed the potential for lower rates but giving no indication as to whether rate cuts could be on the horizon. Alterations to the ECB policy summary did include some dovish tweaks however with forward guidance that rates will remain “at present levels at least through H1 2020” the most notable.

Meanwhile expectations for Fed rate cuts continue to mount, weakening the US Dollar. Friday’s Bureau of Labour Market Statistics jobs report will come under scrutiny with a below-forecast release – as hinted at by the earlier ADP jobs report – likely to fuel rate cut expectations.

“We’ve seen some fundamental changes when it comes to the Fed. In their hiking cycle, they’ve obviously been put on pause. If anything, the market is at least expecting a cut this year, if not two,” wrote State Street Bank branch manager, Bart Wakabayashi, adding “There’s probably more reason to sell the dollar right now as opposed to the strength it usually carries as a safe haven.”

With a forecast aligned with Reuter’s poll’s median projections, Danske Bank analysts expect Fibre to reach $1.15 by the six-month mark.

“ECB turned its back on the dovishly priced market and the market reacted by appreciating the EUR and lowering inflation expectations. As for EUR/USD, it is now faced with a Fed ready to cut rates and an ECB who has only started discussing easing. That should keep positive EUR/USD momentum going,” wrote chief analyst Jakob Christensen, adding ” We forecast EUR/USD at 1.15 in 6M. A sound US jobs report could temporarily weigh on EUR/USD though, but it should not derail the outlook for a summer Fed rate cut.”

Having formed a double bottom in May, the Euro to US Dollar exchange rate has pushed higher into June thus far, with the single currency last seen trading at $1.12397.

US Dollar Softens as Markets Price in 100bps of Rate Cuts

While the Euro zone is facing myriad headwinds and challenges of its own, the recent rebound for the EUR comes as investors ramp up their expectations for US interest rate cuts from the Fed.

Signs of a slowdown in the US economy have been exacerbated by the now multi-fronted trade war – with investors expecting a higher than originally anticipated drag on the US economy. In turn, markets are now pricing for four quarter point cuts to key policy rates before the end of 2020.

Current pricing is a far cry from how 2020 started when markets still priced for the potential of further hikes from the Fed, with the US Dollar supported against major peers by interest rate differentials and clear out-performance from an economic standpoint.

Given recent developments, analyst are now forecasting an end to the Dollar’s fed-induced domination in the currency markets with the Euro expected to rebound as the policy rate differential narrows with the outlook for some hinging on when the Fed actually begin to ease policy.

“For now the Fed may refrain – to the benefit of the dollar – from signalling it is preparing to cut interest rates if U.S. economic data continues to hold up over the summer,” wrote senior macro strategist at NatWest Markets, Mansoor Mohi-uddin, adding “Beyond the summer, however, the prospects of the Fed staying on hold to the benefit of the dollar may be receding.”

Recent data has been somewhat mixed with PMIs holding firm above the neutral 50 level while consumer confidence has fallen. The latest ADP NFP was somewhat worrisome, suggesting a meagre 27k new entrant to full-time employment in May, woefully below the 185k forecast and 271k previous print. Friday’s Bureau of Labour Statistics release is likely to come under scrutiny to see if it confirms the dismal print.

According to the latest poll of foreign exchange strategists conducted by Reuters, analysts are projecting around 4% gains for the Euro versus the Greenback over the coming twelve months with median projections putting Fibre at $1.17 (currently trading at $1.12) by mid-2020.

“We think some developments are now starting to move against the dollar . with expectations that the Fed may need to deliver rate cuts over the next six to 12 months,” wrote currency strategist, Lee Hardman of MUFG, adding “Yield spreads are now starting to move against the dollar and we just think that kind of dynamic, if sustained going forward, should start to erode some of the appeal of the dollar”.

Recent comments from Federal Open Market Committee (FOMC) members have bolstered expectations of rate cuts with St Louis Fed President Bullard stating earlier in the week that a cut “may be warranted soon”. Fed Chair Jerome Powell, while not quite so dovish, said that the central bank could respond “as appropriate” to counter risks arising from the trade war.

While the Dollar has broadly softened over recent session, given markets are expecting in the region of 100bps of cuts over the coming 18 months, the losses have been relatively limited.

“So far, the change in both Fed rhetoric and – even more strikingly – in market expectations, really hasn’t done that much to undermine the dollar,” wrote chief global FX strategist at Societe Generale, Kit Juckes, adding “If the equity bounce and mood improvement in markets lasts, maybe that can continue, but I think the improvement is short-lived, the currency will come under more and more scrutiny.”

Despite the growing expectations for Fed rate cuts, some analysts feel the developing Dollar-negative narrative may be overdone which, coupled with the current demand for safe-haven assets could see the Greenback remain supported.

“I think it is the dollar that is the going to be the asset of choice for many investors now in terms of safe haven,” wrote Rabobank strategist, Jane Foley, adding “he yen will remain the safe haven when things turn really sour, particularly when there is geopolitical risk, but investors have an issue with the yen, and that is there is no yield . I think that factor throws many people back into the dollar.”

Euro Awaits ECB: Will Draghi Out-Dove the Fed?

Sticking with the central bank monetary policy theme, the key focus for Euro investors is likely to be Thursday’s European Central Bank’s (ECB) policy review and subsequent releases.

While the majority of analysts are expecting little in the way of changes to the central bank’s guidance, the single currency is at risk of a further shift into dovish territory from policymakers with all eyes on the post-rates ECB press conference headed by President Mario Draghi.

“Today’s big question is whether Draghi, like Powell, will make a dovish turn and open up for more QE or rate cuts at today’s ECB meeting. In that respect, remember the ECB is already on an ‘easing bias’. But still it might be difficult to live up to dovish market expectations,” wrote Danske Bank senior analyst Kristoffer Lomholt.

While already on an easing bias, recent months have seen developed market central banks across the globa almost unanimously turn towards more dovish policy – with Norges Bank and the Bank of England the notable exceptions to the trend.

Nevertheless, with consensus calling for little changes to guidance, focus is expected to fall on any adjustments to the central bank’s growth and inflation outlooks and more importantly for the Euro near-term, any further details on the long-awaited third round of TLTROs.

“Despite being prepared to throw all tools on the table for this meeting, we expect few fireworks, though TLTRO III terms are likely to be easier than markets expect,” wrote TD securities analysts in a research note, adding “Otherwise, risks are tilted toward a further easing on the forward guidance side, but growth is likely to be revised up a tick, even if inflation sees a small downward revision on the back of weaker core.”

Euro to US Dollar Near-Term Exchange Rate Forecasts Mixed

There’s definitely hints of potential change afoot in currency markets with Fibre at a critical juncture, splitting analyst opinion on whether the recent Dollar softening will progress into a full-in bearish narrative in the near-term or whether Draghi will manage to out-dove the Fed in which case we could see a reversion to the general downwards drift which has dictated the Euro-to-Dollar exchange rate for more than a year.

    Danske Bank

With markets ramping up bets for Fed rate cuts, Danske Bank’s Lomholt expects the ECB to lag in terms of a dovish shift which should keep the single currency supported versus the Greenback.

“More dovish hints from the Fed and a weak ADP employment report temporarily sent EUR/USD up to 1.13 yesterday before the cross more than erased gains on the nonmanufacturing ISM. The market will likely need a significant dovish shift from the ECB today to be inclined to sell EUR/USD, i.e. rate cuts and/or QE on the table,” wrote Lomholt, adding ” We think the ECB will have a hard time living up to market expectations as it becomes clear that the Fed is one step ahead of ECB in the dovish shift. Hence, we do not look for the ECB to derail recent positive EUR/USD momentum.”

Nordea

With a similar outlook, Nordea analysts see near-term upside potential remaining in place for the cross with Draghi expected to be unable to out-dove market expectations relating to the Fed.

“We see risk/reward tilted towards a market reaction with a slightly stronger EUR and higher EUR rates, although Draghi has proved many times that he can be more dovish than the markets expects. This time it will be harder; markets expect a rate cut, very negative outlook for the euro area is already priced in and we expect the TLTRO-III terms to be less appealing than the TLTRO-II terms.

“Further, Draghi is unlikely to open the door more to rate cuts compared to what he already did in April, while the conclusions on the ECB’s review on the possible side effects of negative rates will probably not be ready yet,” wrote Nordea analysts.

ING

With a more Euro-negative outlook, ING economists expect the addition of dovish comments to guidance to weigh on sentiment for the single currency, capping upside potential. Longer-term, however, ING economists are aligned with the findings of the Reuters poll, calling for the EUR to appreciate versus USD before year end and extend gains through 2020.

“The ECB has turned off cruise control and is back to good old data-dependence. Knowing that actually there is not a lot it can do to really kick-start growth if needed, the ECB will stick to its current easing bias, adding a dovish comment here and an easing element there,” wrote economist, Carsten Brzeski.

Global head of stratgy, Chris Turner, added that “A dovish ECB should keep the EUR under pressure on the crosses and EUR/USD resistance at 1.1310/25 intact,” while a rally spurred by a less dovish than expected round of releases could likely be delayed ahead of key US data given its implications for the Fed.

“Any upside breakout would likely come tomorrow – were the US jobs report to come in shockingly poor and tip the Fed over the edge into an insurance rate cut,” added Turner.

Hantec Markets

From a technical perspective, recent price action has formed a bearish reversal pattern with Hantec Markets Richard Perry interpreting the current setup as indicative of renewed correction following the EUR’s recent rally.

“A big intraday reversal lower on EUR/USD hints that the dollar negative positioning is becoming stretched near term. A bearish engulfing candle (bear key one day reversal) has changed the complexion of the chart on a near term basis,” wrote Perry, adding “A mild early move higher this morning shows caution with positioning decisively either way in front of the ECB. However, the hourly chart shows $1.1220 has been previously a pivot area of note and is again supportive today. A close below $1.1220 today would reflect a growing sense of renewed correction. Initial resistance is still based on $1.1265.”

Above: Hantec Markets Euro to US Dollar Exchange Rate Daily Chart

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