EUR/USD: Fundamentals, technical and valuation all aligned for further declines – MUFG

The EUR/USD pair registered losses for the fifth straight week. The fundamental, short-term valuation and technical factors are all aligning to point to this EUR/USD move to the downside having further to go, economists at MUFG Bank report.

EUR/USD set to grind further lower

“The ECB’s 5.0% GDP forecast for 2021 for the eurozone looks a stretch now. Furthermore, there was a speech by Chief Economist Philip Lane who was very firm in his views on inflation risks. Energy shocks tend to be contractionary, he stated, adding that the efforts of the ECB to re-anchor inflation expectations at 2% were not over. This to us is a clear message that there will be strong resistance to any shift in stance or communication through this period of inflation uncertainty.”

“The 2yr US-EU spread just broke through 100bps again and the jobs data is likely to give this spread further momentum in favour of lower EUR/USD. We are at a critical technical juncture here also. On a weekly chart – the 100-week MAV has just been broken and a close at this level is a strong bearish signal. Indeed, the last break to the downside was in Q1 2019 which saw EUR/USD head to the lows below 1.1000.” 

“Our yield-based EUR/USD model also indicates current fair-value for EUR/USD being around the middle of the 1.100-1.1500 range – implying EUR/USD is currently trading about 2.5%-3.0% rich to fair-value.”