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Euro price forecast 2 September 2021 | EURUSD Fundamental analysis


Hawkish comments of the ECB officials and a weak ADP jobs report sent the EURUSD up above 1.185. What’s next? Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

Over the past eighteen months, the ECB hawks have been silent, looking at what the pandemic has done to the European economy. Now, as the life of the currency bloc is gradually returning to normal, they are seizing every opportunity to make their voices heard. Markets believe that the pro-German lobby will win the battle to cut monthly PEPP asset purchases at the September Governing Council meeting, thus pushing the euro-area bond yields up to six-month highs; the EURUSD has risen to the middle of figure 18. Banks’ shares also rose actively, as higher interest rates are the key to income growth.

In 2020, the ECB, through quantitative easing programs, bought up all the net emissions of European bonds. In 2021, it is moving on the same schedule. This cannot go on indefinitely. The euro-area economy is not so weak to require the huge monetary support it currently has. Thanks to PEPP, the ECB managed to press down bond yields, but purchases for about €80 billion per month are not relevant anymore. Most likely, after the September 9 meeting, the monthly pace of asset purchases will be reduced to €40-€60 billion, but this does not mean the monetary stimulus will be withdrawn completely. Resources in the amount of €1.85 trillion will be fully used. By March 2022.

Dynamics of ECB asset purchases under PEPP

Source: Bloomberg

However, most investors used to believe the PEPP would be replaced by another stimulus. By downsizing the pandemic emergency asset purchase program, the ECB will increase another type of QE. Now, they have doubts, as Christine Lagarde claims that the euro-area economy is recovering from the pandemic and only needs “surgical” support aimed at sectors still struggling.

The EURUSD bulls have also been supported by a weak ADP jobs report. Private payrolls rose by 374,000 in August, far short of the forecast for 613,000. If the report of the US Department of labor, scheduled on Friday, will also be disappointing, the US dollar will lose its primary benefit, as investors will doubt that the Fed will announce the tapering of the QE in late September.

Dynamics of ADP employment data

Source: Bloomberg

If the ECB doesn’t boost the APP, the PEPP expiration in March 2022 will be interpreted as a reduction in monetary stimulus. In addition to a decline in coronavirus cases and a faster vaccination campaign in the EU compared to the US, this circumstance should encourage the euro bulls to go ahead. Furthermore, the euro-area GDP grew faster than the US in the second quarter, and the PMIs data suggest that the third quarter will be the same.

Weekly EURUSD trading plan

However, again, the above scenario is just a presumption. It is as probable as a federal funds rate hike in 2022. The EURUSD short-term trend now depends on the US jobs report. A strong reading of the US employment will send the euro back below the bottom of figure 18. A weak report will support the euro-dollar rally towards 1.188 and 1.1935. In the medium term, the ECB’s willingness to start monetary normalization sooner than expected will make the euro unlikely to fall to $1.14. I don’t think the euro will go down to $1.1, as Nordea predicted.

     

Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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