Euro-Dollar Week Ahead Forecast: Contained by Coronavirus Curbs, Budget Row and Economy Fears

- EUR/USD faces headwinds as virus surges, politicians bicker. 
- EUR, risk assets stall as lockdowns spread in Europe and U.S. 
- PMIs & Ifo to estimate Nov's damage as vaccines lose lustre. 
- May put EUR on back foot ahead of Thanksgiving weekend.

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• EUR/USD spot rate at time of writing: 1.1855
• Bank transfer rate (indicative guide): 1.1430-1.1545
• FX specialist providers (indicative guide): 1.1685-1.1750
• More information on FX specialist rates here

The Euro underperformed last week as a souring economic backdrop was further blighted by uncertainty over the timing and delivery of the EU's budget, while new or prolonged coronavirus containment measures in Europe and the U.S. could also hold back the single currency this week. 

The Euro outlook is currently tarred by extended coronavirus-related curbs on activity that are further imperilling the continental recovery, with Germany seen on course to announce another month of lockdown this weekend.

But it is the U.S. where cases are rising the most rapidly and where the likelihood of further restrictions is highest, a development that could prompt demand for the Dollar.

"The rapidly-worsening Covid third wave means more restrictions, everywhere, and soon. Hospitals will be overflowing by the year-end if daily new infections aren't brought down quickly," says Ian Shepherdson, Chief Economist at Pantheon Macroeconomics. "The rolling—albeit piecemeal, and uncoordinated—restrictions now being applied across the country should mean that the Thanksgiving hit will fade from the numbers within a couple weeks."

More restrictions will likely weigh on activity in the world's largest economy, which could prompt investors to adopt defensive positions that ultimately benefit the 'safe haven' U.S. Dollar.

Above: Euro performance against major currencies last week. Source: Pound Sterling Live.

U.S. hospitalisations and infections have hit record highs, leading New York schools to close while restaurants and bars are shutting again elsewhere in the country. The U.S., European and global outlooks are darkening just as EU leaders threaten to delay the bloc's coronavirus recovery fund and next budget.

Economists still expect the two packages to eventually win approval, but not without another "ugly political row" first, while the related uncertainty has already proven to be a burden that's helped keep the Euro below its November highs even as U.S. stock markets briefly reached new 2020 peaks last week.

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"This should remain an important background story for the EUR and other European currencies (CEE FX, scandies) next week," says Petr Krpata, chief EMEA strategist for currencies and bonds at ING. "Grim PMIs could cause the EUR to start the week on the back foot, although the impact should be short-lived considering investors have largely factored in the EZ growth de-rating and improving vaccine prospects are keeping investors upbeat."

Creeping coronavirus restrictions are the backdrop against which investors will digest November PMI surveys from IHS Markit, which are set to provide an early indication of the damage done by this month's shutdowns between 08:15 and 09:00 on Monday. For similar reasons, investors will also pay close attention on Tuesday at 09:00 to November's Ifo index, which will quantify the result of surveys polling more than 9,000 European businesses about current conditions and the outlook for the months ahead.

Above: Euro-to-Dollar rate shown at daily intervals alongside U.S. Dollar Index (black line, left axis).

"It is consolidating below its current November high at 1.1920 and the 78.6% retracement at 1.1926, and is easing back slightly but it will remain bid in its range while above the six month support lineat 1.1682," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank who's a buyer of the Euro from 1.1780 and is targeting 1.2010. "Resistance at 1.1926 is considered the last defence for the August peak at 1.2014."

Bad PMI and Ifo surveys have the potential to see the Euro and other risk assets start the week on the back foot, with the Dollar on the front foot, although surveys will compete for investor attention with a Food and Drug Administration (FDA) announcement from the weekend that it's granted emergency use authorization for Regeneron's antibody cocktail, which President Donald Trump is thought to have taken during his battle with the virus in October.

"Global equities are pausing for breath, caught in a tug of war between medium term vaccine optimism and tightening restrictions to curb covid spikes. In recent days NYC schools were shuttered, California and Illinois reinstituted mitigation plans, Ohio imposed a statewide curfew and Tokyo raised their virus alert to its highest level," says Richard Franulovich, head of FX strategy at Westpac.

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Pfizer and BioNTech said on Friday they would be applying for the same permission for their own developmental vaccines before the weekend, although the safe-haven Dollar actually rose on Friday and the S&P 500 which the Euro is positively correlated with fell by -0.53%.

Friday's stock market losses asked questions of whether a vaccine is already in the price of risk assets or if near-term damage from containment measures simply matters more to investors than vaccines at present. Economies are after all, entering 'lockdown' with the EU wearing a fiscal straitjacket and U.S. lawmakers as divided and far as ever from reaching agreement on financial support for American households and companies. 

"EUR/USD has moved towards 1.19 on the back of the US election but grinded marginally lower again despite positive vaccine developments and sector rotation," says Christin Tuxen, chief analyst at Danske Bank. "Current negative COVID-19 pandemic developments cap the topside for now."

Above: Euro-to-Dollar rate shown at daily intervals alongside S&P 500 index futures (black line, left axis).

There's a risk that early profit-taking in stock markets and resulting Dollar strength continues throughout the week in light of the looming Thanksgiving holiday on Thursday, which will see U.S. markets closed. There may also be a danger that stock declines and Dollar gains lead to profit-taking in emerging markets, which could drive a fresh increase in the trade-weighted single currency and further constrain EUR/USD during the weeks ahead.

"The EUR suddenly does not look as strong since EM FX has rallied and the trade weighted EUR exchange rate is now as cheap as in July, when EUR/USD traded below 1.16. This is something that should work to comfort the exchange rate doves within the ECB over time, but it is still visible that they have their eyes zoomed in on 1.20 for now as was evident by De Cos comments earlier in the week," says Andreas Steno Larsen, chief FX strategist at Nordea Markets. "The best short-term bet is probably to sell the EUR/USD topside in option space with a 1-2-month maturity every time 1.19 is about to be reached in the spot."

Beyond the opening of the week investors will also look closely at 12:30 on Thursday at the minutes of the October European Central Bank (ECB) meeting for clues on what the "recalibration" of "all instruments" that was tipped off last month will actually look like in practice. With Brussels constrained and the continent mired in a double dip recession, the support mustered by the ECB for the economy may be more important now than at any point in the past.

Source: Nordea Markets.