EUR/USD will head down, as the economy declines

Big Investors Don’t Think the ECB Can Keep the Euro Up

Posted Tuesday, February 2, 2021 by
Skerdian Meta • 2 min read

EUR/USD will head down, as the economy declines

The EUR/USD has been bullish since last March, when the USD began to decline, climbing around 15 cents from the bottom. But, this has been more of a USD move than a strengthening of the Euro. Anyway, the EUR/USD has been battling to staying above 1.23, having turned down now to trade above 1.20. I have mentioned before that the Euro will find it hard to keep its gains, especially with the economy falling into another recession.

Some big names in the industry also doubt that the Euro will be able to keep the gains. Scotiabank claims that the ECB is running out of options to stem any further strengthening of the Euro.

The firm says that the rise in the EUR/USD since March last year has prompted “what resembles a campaign to implicitly cap the currency” but that won’t be enough.

“We think that the ECB will soon run out of options to control the EUR, as ‘currency guidance’ lapses and the EUR continue to trade in line with the broader dollar tone, while remaining relatively supported by the erosion of the USD’s yield advantage.”

As for monetary policy, while the ECB has pledged to keep rates low for a prolonged period, the firm says that the market “has little hope the bank will succeed in returning inflation to target, so reinforcing its forward guidance is rather moot.”

I’m definitely not going to argue against that last bit on inflation. As for the outlook for the Euro, they’re pretty much arguing that the market will eventually return to focusing on the Fed put, but I would say that timing matters in this context.

Earlier today I posted the Eurozone GDP report for Q4 of 2020, which showed a 0.7% contraction, while the Italian GDP report posted an even bigger contraction. Below is the Italian GDP report for Q4:

Italy Q4 Preliminary GDP Report

Q4 preliminary GDP QoQ -2.0% vs -2.0% expected
Prior (Q3) +15.9%; revised to +16.0%
Q4 GDP -6.6% YoY vs -6.6% expected
Prior (Q3) -5.0%; revised to -5.1%

Bang on the estimates, as the Italian economy is estimated to have declined by 8.8% as a whole last year, on a non-working day adjusted basis. This just reaffirms the slight softness across the Euro area in Q4, which should continue through Q1 this year.

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