Euro Forecast: Outlook for EUR/USD Turns Bearish

Fundamental Euro Forecast: Bearish

• EUR/USD reversed direction last week as it turned sharply lower in response to a decision by the European Central Bank to keep Eurozone interest rates unchanged rather than cut them as most traders and analysts had expected.
• The ECB’s decision raised fears that it is failing to respond sufficiently to the threat of an economic recession prompted by the Covid-19 coronavirus pandemic.
• The downturn in EUR/USD may therefore continue even though the US Federal Reserve is expected to cut US interest rates again this week to help stimulate the US economy.

Euro price to weaken further?

The Euro was undermined last week by a European Central Bank decision to keep all its key interest rates unchanged. Even though it announced several other measures to ease monetary policy, many traders and analysts – who had been expecting rate cuts – were dismayed, and that is likely to prompt further selling of EUR/USD in the week ahead.

The ECB decision disappointed Euro bulls because it was interpreted by many as a failure to respond sufficiently to the economic threat posed by the Covid-19 coronavirus pandemic, instead increasing pressure on Eurozone governments to ease fiscal policy.

EURUSD Price Chart, Hourly Timeframe (March 9-13, 2020)

Chart by IG (You can click on it for a larger image)

By contrast, the Federal Reserve is now widely expected to reduce US interest rates again this week even though it has already made an emergency half-point cut this month. While such a move might usually weaken the US Dollar, this time it might be interpreted as a strong response to the economic risks and therefore lead to a continuation of the USD buying seen last week.

US President Donald Trump’s announcement of a travel ban on 26 European countries is another potential negative for the Euro, which could also be hit by heavy selling of Italian government bonds that has led to a surge in yields in the European country hardest hit by the coronavirus.

Italy 10-Year Bond Yield Chart, Daily Timeframe (October 8, 2019 – March 13, 2020)

Source: Investing.com

Week ahead: German ZEW

Against this background, the week’s data are unlikely to have much of an impact on the Euro but there could be a response to the ZEW economic sentiment index for Germany in March, due Tuesday. Analysts polled by the Reuters news agency are predicting a drop from 8.7 to minus 23.4, a number that would emphasize how confidence has fallen off a cliff in the Eurozone’s largest economy.

--- Written by Martin Essex, Analyst and Editor

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