EUR/USD Price Forecast 2020: Lean times soon to turn into flush times for euro dollar

• Trade war relief to boost optimism, but could it boost growth?
• Central banks in a comfort zone, adjustments likely in the first half of the year.
• EUR/USD two-year bearish trend remains firmly in place, bears losing interest.
• EUR/USD Forecast Poll for 2020 shows a slight bullish bias.

Markets' lean season has lasted two full years and while those are not yet over, flush times are looking more and more likely for this 2020.

EUR/USD news: The beginning of the end of the trade war?

Ever since hitting 1.2537 in January 2018, the EUR/USD pair has been on a selling spiral that set a multi-year low of 1.0878 just two months ago. The level can hardly be considered an interim bottom when just considering the following price’s recovery, but the focus this time shouldn’t be put on technical readings, but in politics.

The catalyst for the two-year slump was the US foreign policy after Donald Trump became President. In the last two years, the largest EUR/USD monthly decline came in March 2018, when the trade war started. Back then, Trump announced steel and aluminum tariffs on imports from all countries and hit China with the first round of levies. Trade talks quick-started shortly afterward and have extended through the past two years, as just this December they announced that the phase one of a trade deal had been agreed.

It's worth noting that Trump’s trade war was not only with China, although their relation filled most of the breaking news headers. Trump spread its war worldwide and, while the battle is far from over, some positive signs have appeared recently that it might be coming to an end. This December, it was announced that the US Congress had approved the USMCA trade deal.

The trade war is being considered as one of the may catalyst behind the global economic downturn. And again, while it is not over, finally there seems to be light at the end of the tunnel.

Economic growth still a big concern

The eurozone is ending the year with economic markers indicating that the economic deceleration continues. In the US, things look a bit better, but fears of recession persist. Seasonally-adjusted GDP rose by 0.3% in the EU28 during the third quarter of 2019, confirming an annualized growth rate of 1.2%. In the same period, the annualized US Gross Domestic Product was reported at 2.1%.

Meanwhile, the Markit Flash US Composite Output Index hit 52.2 in December, a 5-month high, up from 52.0 in November, indicating “the quickest rise in output since July. Nonetheless, the rate of growth was below the series trend and only moderate overall.” The Markit Flash Eurozone PMI Composite Output Index in the same period came in at 50.6, unchanged from its previous month. The official report, however, states: “The eurozone economy failed to pick up momentum in December, according to the flash PMI, rounding off a fourth-quarter period in which output rose at the weakest pace since the economy pulled out of its downturn in the second half of 2013.”

Employment levels have remained healthy throughout the year in the US, but according to Markit, EU employment growth slowed to a five-year low. Inflationary pressures, however, are nowhere to be found. The EU annual core CPI stands at 1.3% according to the latest data, while in the US, Fed’s favorite inflation figure, the core PCE price index stands at 1.6%, both figures from November 2018.

Central banks’ imbalances, economics turn politics

In this scenario, central banks have returned to the easing path. The US Federal Reserve lowered rates by 25 basis points for a third time in four months back in October, to a range of 1.5% to 1.75%, with Chief Powell signaling a pause, as he said that he does not expect the bank to pull the trigger unless economic conditions worsen unexpectedly.

“Euro area growth remains weak,” said the recently debuted ECB’s head, Christine Lagarde in her first hearing before the European Parliament. Before leaving his chair and back in September, former ECB’s President, Mario Draghi, cut its main deposit rate by 10 basis points to -0.5%, a record low, and announced TLTRO III, implying 20 billion euros per month of asset purchases for as long as it deems necessary.

Policymakers from both shores of the Atlantic have acted to boost inflation. Something central bankers have spent the last decade doing with modest results.

Yet in this front, the scale also leans in US favor, as Chief Jerome Powell seems far more confident that his counterpart Lagarde. The latter has used a more confident wording in her statement, but meanwhile, macroeconomic conditions are still worsening, so it’s hard to believe her. For sure, Mrs. Lagarde is a politician rather than an economist, and more of this confident stance is to be expected, although the effects on the EUR’s performance will be filtered with this knowledge.

2020 the year of change

That’s not an expression of hope, but of need. 2020 should be the year of change. Or at least, the year when things begin to change. The recent trade deals hint some relief in the trade war front, hence in growth’s concerns. Whether the economies will be able to grow or not without the trade conflict in the way, is a different story. But optimism is supposed to reign.

The latest released data suggest that, at least in the US, recession concerns have eased. The EU, on the other hand, is yet to be seen. Both central banks have tackled such preoccupations and acted in consequence, although the EU still has pending to “better coordinate fiscal policies so low-debt countries spend more to boost the region’s economy while high-debt countries shore up their finances,”  European Commissioner for Economic Affairs Paolo Gentiloni said. Coordinating fiscal policies is at the top of ECB’s wish list and it has been for years. Maybe Mrs. Lagarde can kick start the process.

Economic developments and central banks’ decisions will motorize action throughout the first half of the year. Signs of growth, should the trade deal continues progressing, will take a few months to kick in. But for sure, the market will continue depending on it.

In November 2020, the US will go to the polls. That grants a shaky year-end in the financial world. Will Trump be able to retain its chair? If not, what will happen with US foreign policy? For sure, the US election will be THE event of 2020, as those would set the dollar’s direction for the next couple of years.  

EUR/USD technical outlook

The EUR/USD pair is ending a second consecutive year with losses. Having started it with 1.1460, it's ending it sub-1.1100, with the year low at 1.0978. The bearish trend remains firmly in place, according to the monthly chart, with no signs of downward exhaustion just yet.

In the mentioned time frame, the pair is developing below all of its moving averages, with the 20 SMA been the strongest and around 1.1320. The 23.6% retracement of the 2018/2019 slump comes at 1.1265, while the 38.2% retracement is at 1.1510. The latter is critical, as the EUR/USD pair will enter bullish territory once it breaches above this level. EUR/USD hasn’t been around this level since January 2019. Technical indicators, in the meantime, remain within negative territory, aiming to recover, but lacking enough strength to confirm so.

On a weekly basis, EUR/USD is neutral, having been unable to find a certain direction since mid-October. The pair is hovering around a mild-bearish 20 SMA ever since then, while the longer moving averages remain far above the current level, with the 100 SMA converging with the mentioned 38.2% retracement. Technical indicators are stuck to their midlines.  

The latter chart suggests that bearish pressure has eased, but that bulls are nowhere to be found just yet. The 1.1000 psychological figure is the immediate support level and a line in the sand as, below there, bears could become bolder and try to retest the 2019 low. The next bearish target once below 1.0880 is 1.0720, en route to 2017 low at 1.0340. 

 

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Gregor Horvat projects a bearish outlook for the Euro Dollar on his Elliott Wave analysis:

 

Forecast Poll 2020

I think that Lagarde my bring some changes to the ECB and EU countries may invest more to provide stimulus and press on with the "green deal" Therefore the EUR price looks to me that it has only limited upside overall. 

by Alexander Douedari

Signals for 2019 were bearish as a sequence of lower quarterly highs & lows turned momentum studies lower. These were confirmed as 2019 has posted a lower yearly high at 1.1574 and a lower yearly low just below 1.0900. November was an inside month which stalled the Q4 rally and held prices below the 2017 Marabuzo line. As such, signals for 2020 remain cautiously bearish and our call is to sell below the November lows at 1.0977 with a stop loss at the 2017 Marabuzo line at 1.1200 with targets to the 2019 lows at 1.0877, the 2017 pullback lows at 1.0500 and even the 2017 lows at 1.0313.

by Justin Paolini

 

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