Euro: forewarned is forearmed. Forecast as of 23.02.2021

If you can’t control the causes, you will hardly influence the situation. The ECB’s attempt to stop the growth of the global bond market yields is doomed to a failure. How will it affect the EURUSD? Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

The ECB’s warning shots do not encourage the EURUSD bears. The euro bulls prefer to spot the signals about the recovery of the euro-area economy. Strong Germany IFO business climate index is a stronger argument for the euro buyers than Christine Lagarde’s statement that the European Central Bank is closely monitoring the euro-area bond yields. If European bond yields continue growing, the euro-area financing conditions could deteriorate, setting back the euro-area GDP recovery. However, the bond markets do not depend on only the ECB.

Lagarde noted that that the yield on sovereign bonds is essential, as banks use it as a benchmark when establishing the cost of loans to households and firms. Therefore, the central bank “is closely monitoring the evolution of longer-term nominal bond yields.” However, I believe the reasons lie much deeper. An increase in debt market rates makes European assets more promising, which contributes to the capital flow from the US into the euro area, supporting the EURUSD growth. According to UniCredit, if the euro-area bond yields continue growing, it’ll leave the ECB no choice but to step up the QE. The European Central Bank has already increased the weekly pace of bond purchases to €17.2 billion under the pandemic purchase program, the most since the week ended January 15.

However, if the ECB can’t control the causes, it can’t radically affect the situation. The bond yields are growing elsewhere in the world amid the expectations of the US GDP rebound. Bloomberg raised its US growth forecast for 2021 from 3.5% to 4.6%, suggesting it could be revised up to 6%-7% if Congress approves Joe Biden’s $ 1.9 trillion fiscal stimulus package. Besides, the Fed officials try to convince investors that they are not worried about Treasury yields rally since it reflects the US economy’s strength.

The current situation has a lot in common with the events of 2013 when the US bond rates were also growing, but there was still a long time before the federal funds rate hike. The FOMC now expects it will not change the interest rates until 2023, and the asset purchase program at a monthly pace of $ 120 billion will continue.

Dynamics of federal funds rate and US 10-year Treasury yield

Source: Bloomberg

Jerome Powell is likely to confirm the Fed’s position in the speech before Congress. If the Fed Chair sounds dovish, the US dollar should further weaken.

Weekly EURUSD trading plan

The ECB’s warning shots failed because the decline in the euro-area bond yields, which resulted from Lagarde’s speech, led to a rise in the euro-area stock indexes. Their US peers, including the Nasdaq Composite, went down. If S&P 500 has been above its pre-pandemic level for a long time, the EuroStoxx 50 has not reached the level it was trading before the recession. The euro-area equities are undervalued, so they could gain strong momentum if the lockdowns are lifted and the euro-area GDP rebounds. If the EURUSD breaks out the resistance at 1.218, it will continue rallying up towards 1.221 and 1.2245.

   

Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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