After the ECB and before the lockdown: where is EURUSD headed?
When looking at the EVZ, Euro FX VIX, which measures volatility in the Euro FX-Future, recent developments indicate rising volatility in the Euro and, thus, EURUSD.
There has recently been new lockdowns in Europe as a response to the new wave of Coronavirus infections:
- France has imposed new restrictions and a lockdown
- Germany, the biggest European economy, is now also planning a lockdown, even though German Chancellor Merkel calls it a light lockdown, mainly focusing on closing bars and restaurants
Since these new restrictions conflict with the need to revive economies battered by the crisis, the Euro dropped back below 1.1800, most likely due to market participants expecting the ECB to unleash further monetary stimulus at some point in the near future.
In addition:
- While the ECB didn't implement a looser monetary policy at its meeting on Thursday, the rhetoric of ECB president Lagarde clearly pointed to an increase of the size of the PEPP envelope from €1.35tn to €2.0tn at the December meeting
- This, along with further cuts in the ECB deposit rate by the end of 2021
This would usually, under normal circumstances, result in a very bearish outlook for the Euro against the US-Dollar and explains the drop back below 1.1800. However, the expected US-Dollar weakness that will occur once Democrats and Republicans finally reach a deal on an economic relief package financed with freshly printed US-Dollar from the US central bank FED, will limit the downside in the EURUSD.
While another attack on the region around 1.1600 and even a stint to as low as 1.1450/1500 is in the cards, we are still considering any short-term Euro dip to be short-lived with the currency pair likely to see an aggressive attempt to capture 1.2000 over the course of Q4/2020, especially if a break above 1.1900 is seen:
In 2015, the value of the EURUSD fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, in 2018, it fell by 4.4%, and in 2019, it fell by 2.2%, meaning that in five years, it was down by 7.3%.
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