The market usually buys the news. Therefore, the EURUSD is rising even without the ratification of the European Recovery Fund. This mechanism suggests an optimistic future for the euro-area and the euro. Let us discuss the Forex outlook and make up a trading plan.
Fundamental euro forecast today
Italy, Greece, and Spain are running big budget deficits and planning to spend on a grand scale to revamp their economies. Italian Prime Minister Mario Draghi and other leaders in the region claim that increased investments can give lasting support to growth. If the plan doesn’t work, these countries will be saddled with some of the world’s highest debt ratios, potentially destabilizing the euro-area economy. After all, as long as things go according to the plan, the EURUSD bulls can go ahead.
Although the money from the European Recovery fund is not yet coming, and Brussels is criticized for the slow ratification process, the mechanism is already yielding the results, which is evident from the euro strengthening in April. The European Recovery Fund allowed Italy and other currency bloc members to have a reliable investment plan. Italy will receive €190 billion, including €70 billion in grants. Mario Draghi expects to add another € 60 billion from the local budget. It turns out to be quite a sum, allowing Italians to look to the future with optimism.
Benefactors of European Recovery Fund
So, the stimulus, in addition to the acceleration of vaccination in the EU, supports the PMI growth. In April, the euro-area manufacturing PMI reached 62.9, the highest in the entire 24-year history of research. The sector is clearly booming as demand recovered so quickly that many products were in short supply. If we add to this the positive from retail sales in Germany, it becomes clear that the worst for the currency bloc is over, and the best is yet to come. But it will take several more months before the European economy features a clear improvement. According to the ECB Vice President Luis de Guindos, if the EU’s ambitious plan to vaccinate 70% of the adult population is implemented, the central bank may start thinking about rolling back monetary stimulus.
The ECB may start unwinding the QE before the Fed takes active steps, which suggests a bullish outlook for the EURUSD. According to New York Fed President John Williams, the current data and conditions are not enough for the central bank to change its position. Jerome Powell recently argued that they need to see several months of positive data to show progress towards the Fed’s goals. Is it possible that strong statistics on the US labor market for April will make adjustments to the Fed’s outlook?
In my opinion, the euro is much stronger now than it was in the first quarter, but it is too early to give up on the greenback. May is seasonally a bad month for the S&P 500, whose drop amid the Treasury yield rally resulted from the strong US domestic data will lure investors back to safe-haven assets.
Seasonal dynamics of the S&P 500
Source: Nordea Markets
EURUSD trading plan today
In the March-April period, the EURUSD had clear trends. In May, however, the pair can get stuck in the consolidation range, as both the euro and the dollar have their own benefits. If the price breaks out the resistance at 1.208, it could be relevant to enter longs. If the market breaks out the support level of 1.201, one could enter shorts.
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.