Fundamental Euro Forecast: Bearish
- There are glimmers of hope for EUR/USD bulls in the week ahead now that market pricing has adjusted to suggest traders finally believe European Central Bank President Christine Lagarde when she says there will be no Eurozone interest rate hikes next year.
- The problem is that at the time of writing risk-reversals are still pointing to further weakness and the daily chart shows clearly that traders have sold into every major rally in the pair since late July – and will likely do so again.
Euro price still at risk of falling further
The argument that “you should never try to catch a falling knife” was in widespread use last week as traders watched EUR/USD drop. This week it still applies even though there are some faint hopes of at least a minor bounce, if not yet a decent correction.
As I wrote last Wednesday, there is no end yet in sight for EUR/USD weakness and that remains true. The coronavirus picture in continental Europe continues to worsen and even the news later last Wednesday that Eurozone inflation hit 4.2% year/year in October – more than twice the ECB’s target – will not lead to a rate hike this year or next year.
That’s what ECB President Christine Lagarde has said repeatedly, and traders have finally abandoned their bets that she and her team will change their minds. Risk reversals – the difference in implied volatility between comparable call and put options – are suggesting further weakness, with puts still at a premium, and, as the daily chart below shows, traders have sold into every sizeable rally in EUR/USD since late July and will likely do so again.
EUR/USD Price Chart, Daily Timeframe (May 18 – November 18, 2021)
Source: IG (You can click on it for a larger image)
In fact, the only real sign that selling could end soon was the latest Commitments of Traders (CoT) report from the US Commodity Futures Trading Commission that showed hedge funds now only marginally negative EUR/USD after some sizeable buying over the past month.
Enough to risk trying to catch the knife? Probably not. And note too that implied volatility is high so some sharp moves either way would be no surprise.
Week ahead: business and consumer confidence
Turning to the economic calendar, the most important release will likely be the Ifo business climate index for Germany this month, due Wednesday and expected to show a modest slip to 96.5 from 97.7 in October. Consumer confidence figures for the Eurozone are due Monday, followed by the “flash” purchasing managers’ indexes for November Tuesday.
The German third-quarter GDP numbers, also out Tuesday, are final figures so unlikely to have an impact.
— Written by Martin Essex, Analyst
Feel free to contact me on Twitter @MartinSEssex