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Isn’t euro undervalued? Forecast as of 22.11.2021

New lockdowns in Europe, the energy crisis, and the return of the Brexit topic press down the EURUSD. Furthermore, the divergence in the monetary policy of the Fed and the ECB encourages the euro bears. However, the euro might be undervalued. Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

A new pandemic wave has started in Europe, and there are new lockdowns. At the same time, the FOMC officials are discussing a faster tapering of the stimulus than financial markets currently expect. The EURUSD is naturally going down. The turnover in the euro-dollar options has significantly surged, puts are outpacing calls by 4-to-3. The risk reversals have been the most bearish for the euro since May 2020, and the volatility surge to the highest levels since March signals a potential plunge in the single European currency to $1.113 in the next three months.

Austria has been the first country in the euro-area to return to a nationwide lockdown; Germany does not exclude such a possibility, and the Netherlands closed restaurants and bars amid an increase in the number of COVID-19 cases. Fear has struck not only the unvaccinated but also those who received both injections, leading to a slowdown in economic activity and growth. The euro-area PMIs are likely to show a decline in November. This will suggest the euro-area GDP slowdown in the fourth quarter, which, against the background of the US GDP rise, is one of the strong arguments for selling the EURUSD.

A new wave of the pandemic, the return of the Brexit topic, and the energy crisis in Europe could force the ECB to abandon its plans to cut the emergency asset purchase programme of €1.85 trillion by March. On the contrary, the Fed is weighing the prospects of speeding the QE taper process, according to Richard Clarida and Christopher Waller. Waller says he would like to see the end of the $120-billion program in the first quarter, in order to raise the federal funds rate in the second, if necessary. He notes that borrowing costs are currently at zero, so even a small increase will still keep monetary policy ultra-easy. The official suggests the Fed should consider reducing the balance sheet size, which currently stands at $8.6 trillion.

Although the FOMC composition is constantly changing, the US central bank repeats the same mistake again and again. The Fed has been maintaining low interest rates for too long, counting on a soon inflation slowdown. The dovish tone of the US policymakers stifles long-term savings and private sector investment, which negatively affects the economy. And while there are signs that supply chain problems are being resolved, the Fed’s refusal to keep inflation at 2% is driving inflationary expectations up.

Weekly EURUSD trading plan

The highlight of the week ending November 26 will be the releases of the meetings’ minutes of the FOMC and the ECB and the PMI data in the euro area and the USA. There will also be published the report on the US PCE, the Fed’s preferred inflation indicator. The week is rich in economic events. In the meanwhile, I would like to note that the EURUSD bulls’ failure to keep the price above 1.133 has signaled their weakness. The above-mentioned level is now a strong resistance level. The support is at 1.122.

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