EUR/USD: Bearish bias remains in place – MUFG

Analysts at MUFG Bank, continue with a bearish bias for the EUR/USD pair. They expected it to trade in the 1.1500-1.2000 range over the next weeks. They point out the near-term outlook for the US dollar has turned more positive with risk aversion more evident in the financial markets as investor fears over the spread of the Delta variant undermines the positive growth outlook. 

Key Quotes:

“We are maintaining a bearish bias for EUR/USD in the month ahead. The pair has recently fallen back towards the year to date low at 1.1704 from the end of March. The next key support level is provided by the lows from late last year at 1.1603, and would then open the door for a break back below the 1.1500-level. Downward pressure on EUR/USD has been driven by two key developments: i) the adverse market reaction to the Fed’s hawkish policy shift in June, and ii) safe haven demand for the US dollar has picked up recently as market participants have become more concerned over the global growth outlook.”

“Market participants will be closely watching for further signs of slowing global growth momentum over the summer period. The next FOMC meeting will be scrutinized closely to see if the Fed has made further progress towards slowing the pace of QE. It is the final FOMC meeting before Fed Chair Powell’s much anticipated annual speech at Jackson Hole at the end of August. Building fears over the global outlook and falling market-based measures of inflation expectations could encourage the Fed to be more cautious by waiting until later this year before tapering. A more cautious approach would at least help to dampen US dollar strength in the near-term.”

“The recent sharp pick-up in COVID cases in Europe, especially in the Netherlands and Spain, has increased downside risks to forecasts for robust growth in the euro-zone and undermined near-term sentiment towards the euro.”

“Markets participants will be looking for the ECB to adjust plans for their QE programs (PEPP & APP) as well to provide reassurance that looser policy will be maintained. It should keep downward pressure on EUR/USD as the Fed moves closer to tapering QE.”