Not a great start to the year for EUR/USD

Author: Forex Live | Category: Education

EUR/USD has endured a rough first three months to the year

TM
2021 hasn't been the best of starts for the Euro. The eurozone economy has not seen the scale of recovery that we've seen elsewhere such as in the US and the UK and while both the Dollar and the Pound have broadly risen this year, the Euro has been the laggard. EURUSD is trading 5% lower on the year against the Dollar, marking its first negative quarter since Q1 2020, and is at risk of further losses over Q1 and is down around 6% against GBP.

Key Factors Driving EURUSD Lower

In terms of gaining a cross sectional view of the Euro's demise this year, there have been three key factors: 1) the slower vaccine rollout and extended lockdowns 2) dovish guidance and intervention from the ECB 3) the rally in USD.

COVID Developments

Let's face it, the COVID landscape in Europe is not looking good. While both the US and UK have marched ahead and cleared key milestones in their vaccination efforts, much of the eurozone is still really just starting to gather initial momentum. Countries in the eurozone were slow to start vaccinating, have experienced weak uptake among their citizens (no doubt influenced by hesitance among political leaders) and have suffered many supply disruptions.

With vaccination progress well behind that seen in other leading economies investors have been scaling out of the EUR upside position built over 2020. Many countries were banking, and now are just hoping, that they are able to get enough of a handle on the virus to allow for the return of widespread travel over the summer tourist season. However, with several countries such as France, Germany and Italy going back into lockdown over fears of the start of a fresh outbreak of the virus, this is now looking less and less likely.

Dovish Comments from ECB

In light of the slow vaccination rollout, the problems suffered along the way and the resurgence in COVID infection rates over several key countries over recent weeks, the ECB has been confronted by a fairly bleak picture when compared with both the UK and the US.  While interest rates and asset purchases have been held unchanged over the quarter, the ECB has maintained a consistently concerned and dovish tone. At the March meeting, Lagarde declared that the pace of bond purchases would be increased significantly over the coming quarter in an effort to combat the rise in yields over Q1 which is threatening the economic recovery further.

Stronger Dollar Creating Headwinds for EUR

The final piece of the puzzle then has been the resurgence in the US Dollar. After selling off firmly for three consecutive quarters into the start of 2021, this quarter has marked a stark shift with the Dollar Index rebounding around 4% on the year. As a result of the success with the US vaccination progress and with the passing of Biden's $1.9 trillion stimulus package, the US economic outlook has been upgraded, with inflation expectations and yields rising, further weighing on the eurozone economic recovery.

So, given the issues which have contributed to the declines seen across Q1 and with the issues remaining, the question is, where is EURUSD headed over Q2.

Q2 EURUSD Outlook

Well, with the Dollar looking likely to continue higher in the near term as a result of the impact of the president's fiscal package and the ongoing lift in inflation expectations, the near-term risks for the Euro appear skewed to the downside. This is especially true when we consider the economic impact of some of the bloc's key economies going back into lockdown. The extent of this downside will depend on how the current third wave progresses and how quickly the eurozone can pick up the pace of vaccinations.

Upside Risks to Note

However, despite the near-term bearishness, looking out across the quarter there is potential for the Euro to recover. Given that much of the near-term bad news is likely priced in at this point, if the eurozone vaccination programme can pick up pace in the coming months, the Euro should start to see the same positive sentiment shift seen in the UK and US in response to vaccination progress. Additionally, with some risk events on the horizon for the US, such as the impact of the president's planned tax increases and regulation overhauls, the USD rally might run into some trouble, adding further support for the Euro.

So, finally, let's take a look at the technical layout and pick out some key levels to watch.

Technical View

EURUSD

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The sell-off in EURUSD over Q1 has seen price breaking down through the rising channel from last years' lows and the 1.1987 level. Price is currently testing the 1.1756 level support which, if broken, opens the way for a run down to the 1.1613 level. This will be the key downside pivot for EURUSD. A break below there (the last swing low in the uptrend) will confirm a bearish reversal, putting the 1.1417 level in focus. To the topside, bulls need to see a recovery above the 1.2090 level to regain upside momentum.

This article was submitted by Tickmill.

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