Fundamental Euro forecast today
Germany is more likely to have a V-shaped rebound than other world’s economies
Hope is the last thing to die. The epidemiological situation is deteriorating in the USA, and there are concerns about another lockdown and a W-shaped recovery of the U.S. economy. Nevertheless, investors still hope that the epic rally of the S&P 500, which occurred in the second quarter, will resume in the third quarter. The matter is not only in the COVID-19 and speed of the GDP recovery trend but also in the huge amounts of money held by the U.S. stocks bulls. Although the FOMC tone is cautious, nobody is willing to go against the Fed.
According to Jerome Powell, the U.S. economy rebounded faster than the central bank had expected, but “a full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities”. The Fed’s Chair has supported both the U.S. dollar, saying that the path forward for the economy is extraordinarily uncertain, and the U.S. stock indexes, whose trends are a kind of mirror of the GDP recovery trend. The S&P 500 was also supported by Larry Kudlow, the president’s chief economics adviser, who said that the idea of the strong V-shaped recovery is still right there.
I still believe that the correction of the U.S. stock market will hardly be deep, as it is not beneficial for either the White House or the Fed. Furthermore, it is good that the euro takes the initiative more and more often. Berlin tries to resolve the dispute between the Constitutional court and the ECB, the euro-area economic data are improving, and the improvement of the epidemiological situation in the euro area suggests that the European economy should recover faster than the U.S. growth.
Dynamics of COVID-19 daily new cases
Source: Nordea Markets
According to the German Finance Minister Olaf Scholz, the ECB has convincingly demonstrated all the documents justifying the QE program, so the German government sees no obstacles to the Bundesbank’s continued participation in the ECB’s bond-buying program. An increase in the inflation rate, positive forecasts for retail sales data, and huge monetary and fiscal stimulus suggest that Germany’s economy is more likely to follow a V-shaped recovery than any other world’s economy. The export-led euro-area economy is also supported by China reporting the growth of the manufacturing PMI and continuing to fulfill its trade obligations to the United States.
As long as China is buying U.S. exports, financial markets can remain clam. China bought only 19% of the declared $170 billion of US agricultural products in the January-May period, according to Bloomberg, but there was a global downturn. The global economic situation is gradually improving, so everything should be alright.
Dynamics of implementation of the commitments by China
My forecasts might seem too optimistic, but several reasons are supporting this scenario. If the U.S. epidemiological situation improves, the euro-area economy, including Germany, rebounds faster than the U.S. growth, and there are no trade wars, the EUR/USD may well hit 1.14 and 1.16.
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Price chart of EURUSD in real time mode
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