Here’s Where The Major Currencies Will Be Moving In 2020 - Yearly Forex Outlook For EURUSD, GBPUSD, USDJPY
US Dollar 2020 Fundamental Analysis: For How Long Will The Two Main Pillars Support King Dollar?
The greenback finished the past year almost unchanged on a broad basis, with the (DXY) Dollar Index only marginally strengthening compared to where it started 2019.
The Federal Reserve completely flipped from hawkish to dovish at the start of 2019 and went on to cut rates 3 times in the second half of the year. However, that alone was not enough to weaken the Dollar as the US economy continued to be a better performer than the rest of the world, and Europe in particular. This divergence in economic growth on the one hand, and the safe-haven qualities of the greenback on the other hand - in what is still a fragile geopolitical and economic global playground (amid trade wars and else) - were the two main factors that kept demand for US Dollars high in 2019.
That seems unlikely to change over the next few months into 2020, so the moderate but broad USD bullish trend remains intact for now
Dollar bullish trend unshaken for now, but what could end it?
However, while currently, the factors are aligned in favor of the Dollar, it doesn’t mean that it will remain so forever. Considering the above, the main risks to the bullish USD outlook is a reversal of the supportive factors against the Dollar. That would be:
Such developments would tear down the two very factors that kept the Dollar strong for the past year and a half. These are not that unlikely, and in fact, sooner or later will probably materialize as economies and trade relationships normalize. Considering that the US Dollar continues to trade at fundamentally overvalued levels, a USD correction and decline won’t take much to arise, once the pillars underneath the uptrend are dismantled.
What will matter for the greenback in 2020?
Fears for a recession were not materialized in 2019, to a large extent owing to the quick and powerful reaction from the Fed to provide monetary easing on the first signs of economic weakness. But that doesn’t mean those fears can’t return, and if they do, the Fed now has less ammunition to fight off economic shocks or stock market sell-offs.
USD traders will also closely watch the race for the US Presidential Elections set for November. Trump winning another 4 years for President would likely be the best election scenario for the Dollar as his policy tendencies of fighting trade wars and boosting growth by fiscal spending are in line with the same two USD supportive pillars we discussed above.
The US-China trade war will remain a special focus for the USD. While the two countries are about to sign a phase 1 of the deal, investors are skeptical that trade war fears are ending here. Many are wondering whether Trump will then open new trade war fronts with other nations after China is out of the way. Nonetheless, such an environment wouldn’t be bearish for the US Dollar, as we said earlier and would likely even benefit it.
Euro 2020 Fundamental Analysis: Economy Remains Grim; Not Much To Be Excited About For The Single Currency
The Euro has seen better times than 2019. The single currency was on a steady path of decline due to the continuously worsening economic outlook and subsequent restart of the ECB QE money-printing program. The economic woes from 2018 extended into the whole year of 2019 and deteriorated further, hurting growth across the EU region.
Additionally, political risks within the Eurozone remain elevated, as has been the case in recent years, and are another incessant factor that is pressuring the Euro currency. Far-right politics continue to enjoy increasing popularity, which by definition, increases the risk of an EU break up, although that is not an imminent danger, of course. Nonetheless, if the trend of rising populism across Europe persists, it will continue to have a negative impact to some degree on the value of the Euro.
What can the ECB do more to help the Eurozone economy?
The ECB has a new President in the name of Christine Lagarde, who announced that the ECB will undergo a process of a strategic review. Their conclusions from it, expected around the end of 2020, can shape the future of ECB policy for the next years and decades.
The ECB is expected to expand the QE program later this year as the initial rate of €20 billion purchases per month is unlikely to be enough to reignite growth in the economy. If the ECB gets really aggressively dovish on this, then the Euro could take another serious blow. Some, on the other hand, have argued that Lagarde and the new ECB leadership may press Eurozone governments for stronger fiscal stimulus to help restart growth in the Eurozone. If things start to move in such a direction, it would be supportive of the Euro currency, though for now, that seems unlikely.
Trade negotiations and risks of trade wars
The EU-UK negotiations over their future trade relationship will also be a factor for how the Euro trades in 2020. Furthermore, if Trump starts imposing tariffs on the Eurozone (as he does on China) that would be another factor that will hurt the Euro significantly. Although, consensus expectations are for a non-damaging – positive resolution of both these issues.
Overall, there are many negative risks for the Euro, which should keep it pressured to the downside, at least for the first half of the year. At the same time, the major risks still look unlikely to materialize. Thus, there is also a possibility that if some of these factors improve, the pessimism may be replaced with optimism, and the Euro currency could benefit and strengthen (something like in 2017). It remains to be seen in which direction Euro fundamentals will pull the currency in 2020.
EURUSD 2020 Technical Analysis:
The degree of depressed volatility on EURUSD over 2019 is bewildering as the pair consistently recorded historically smallest trading ranges month after month. The trading range of the whole year of 2019 was a shockingly mere 700 pips, which is the lowest yearly trading range since the Euro’s introduction in 1999!
The pair made an attempt on the weekly 18-month resistance trendline in the last trading days of 2019, but is now getting rejected in the first trading week of 2020. What happens here at this resistance trendline can be crucial for the technical picture as a bullish breakout can open the way toward 1.15 and even 1.18 for EURUSD. On the other hand, if the resistance holds, then the 18-month long downtrend will likely remain in force and continue to press EURUSD lower.
Two bearish channels currently are active on the long-term EURUSD charts:
The technical outlook thus remains predominantly bearish on the monthly timeframe due to the two bearish formations that are currently still active.
Major resistance stands at 1.18 of the multi-year falling resistance trendline. So, even if EURUSD makes a bullish breakout of the resistance trendline of the current 18-month old bearish channel, stronger resistance will still be waiting just 600 pips higher around 1.18. The massive breakout will happen if EURUSD starts to move above this 1.18 – 1.20 resistance area; however, to crack that resistance, an immensely powerful bull trend will be needed.
To the downside, the 1.05 lows from 2016 are coming increasingly in focus, especially after several important support areas didn’t hold in 2019. Technically, the current 18-month channel projects that EURUSD would reach this 1.05 support area in about 6 months if it continues to trade inside the channel as in the past 18 months.
Beyond 1.05, parity bets will return on the table, and many traders may even look for EURUSD to reach prices below 1.00 in this kind of scenario.
British 2020 Fundamental Analysis: Post Brexit UK-EU Trade Relationship Now In Focus; “Hard” Brexit Still Technically Possible Keeps GBP In Check
Once Brexit is done at the end of January, the focus for the British Pound will quickly turn to the long-term future relationship between the UK and the EU, which is expected to be negotiated over the course of the next 12 months or more.
UK economy not helping GBP either
The economy is the other place where the focus will go, and that is not a bright spot either. The UK economy is in bad shape, and that has been weighing on GBP too in the last year.
The Bank of England will have a new Governor once Mark Carney’s term ends in March. His successor, Andrew Bailey, may have a difficult job to manage the UK economy after the divorce from the EU, and particularly given that “Hard” Brexit risks still exist. If the economy continues to worsen, the Bank of England will likely respond by cutting rates. Thus, the risks of a deterioration of the economy and the Bank of England easing policy is another risk factor in addition to Brexit risks that is holding back the Pound.
Furthermore, on the UK political front, now that Brexit will be out of the way, Scotland may seek another independence referendum. This can destabilize the UK and the Pound currency again (as in 2014), if the question of another Scottish independence referendum is considered more seriously by UK lawmakers. Nonetheless, it is not in focus now as it is not likely to be an immediate risk, at least not for this year.
Getting a trade deal with the EU the key for GBP now
Overall, GBP seems to be is in for more rough rides in 2020. Yes, the first part of Brexit is behind us, but the future trade relationship with the EU is the key. The transition period ends on December 31, 2020, and if the two sides don’t reach a trade deal by this date, then there will still be the possibility that the UK crashes out of the EU without a trade deal. Over the coming months, GBP is likely to trade based on the swinging probabilities between a “soft” or “hard” (Brexit) trade deal depending on which side the negotiations will lean on at a given time.
GBPUSD 2020 Technical Analysis:
The 1.20 major support area that we noted this time last year held, and GBPUSD found itself finishing 2019 higher. Other than confirming the bottom here at the 1.20 support, there were no significant developments on the long-term charts for GBPUSD in 2019.
The 1.33 resistance area held twice in 2019, in March and December. It continues to be a critical resistance area that needs to be cleared for GBPUSD to advance higher. The next important resistance is at the 1.40 – 1.42 area, where the highs from 2018 stand. Further higher, the 1.50 area is the next resistance of importance. However, GBPUSD not likely to come anywhere near it except in an extreme (bullish) scenario.
Overall, GBPUSD has remained in the broad 1.20 – 1.40 range and is likely to stay in it over the coming months as the Brexit drama plays on.
The December rejection at 1.33 – 1.35 suggests some extension of the retracement to the downside is likely from current levels. In this regard, the 1.25 support zone should hold if such a move is only going to be a retracement.
The confirmation of the bottom at 1.20 is significant nonetheless and underpins a solid base – casting a bullish bias on the monthly timeframe of GBPUSD. It continues to be the crucial long-term support for the pair, which would be broken only in an extreme (bearish) scenario, such as a no-deal “Hard” Brexit.
Japanese Yen 2020 Fundamental Analysis: No Shortage Of Risks On The Horizon Should Keep JPY Supported
The Japanese Yen was also largely stable over the course of 2019, although bouts of risk aversion unsurprisingly did cause sharp volatile gyrations at times.
The usual issues of trade wars, geopolitics, and yield spreads between Japan and other countries will remain the drivers of JPY movements. The Bank of Japan is expected to keep monetary policy steady throughout 2020, though inflation is still forecasted to undershoot its 2% target. With the bank holding rates firmly in negative territory, the best chance for the Yen to weaken would be on rising bond yields in other major countries, which would lift JPY pairs as investors search a better yield.
JPY’s risk-sensitive nature makes it prone to sharp reversals in adverse market circumstances
Of course, the Japanese Yen remains highly sensitive to the broad risk sentiment and could strengthen significantly in the face of adverse economic or geopolitical shocks. And, as we discuss in our 2020 Yearly analysis, there is no shortage of places from where such a shock could come. Thus, I highly recommend that you also read that analysis titled “2020 Yearly Analysis: What Will Drive The Markets & Currencies In 2020?”. It is a review of The Economy, Trade Wars, Brexit, and Geopolitics that will give you a sense of the large-scale factors that will be driving currencies in 2020, and especially the Yen as a safe-haven currency.
A possible US recession or a big financial crisis can be added to the list of risks that will favor the Yen over other currencies. On the other hand, good news on these same risks (such as the US-China trade war, Brexit, geopolitics or simply the global economy) would help to lift JPY pairs (weakening the Yen). In fact, we are already seeing this in action with USDJPY is rallying toward 110.00 as the US and China are preparing to sign a phase 1 trade deal this month.
Overall, the multitude of risks on the horizon should, at least for the time being, keep JPY among the preferred currencies for Fx investors.
USDJPY 2020 Technical Analysis:
Nothing changed on the USDJPY long-term technical picture in 2019. The pair continued to trade between the already established technical zones and continued to test the broken resistance trendline, but never closed past it (see chart). Thus, the technicals here remain stuck at the start of 2020 as well.
One new development here is that during 2019 USDJPY formed a new smaller resistance trendline (also shown on the chart). This pair is now testing this resistance area which stands presently at the 109.00 area. The 110.00 area is even more important resistance, and until it is broken too, we can’t count on a big bullish breakout just because this trendline has been taken out.
Above 110.00, the next significant resistance higher would be toward the 115.00 area, which would be reachable potentially in such a scenario. However, we also have to remember that USDJPY experienced setbacks at 112.00, 113.00 and 114.00 each in the past 2 – 3 years, so each of these round number levels will likely be moderate resistance zones again.
To the downside, 105.00 was cemented as support. USDJPY got sharply rejected twice at this 105.00 major support over the course of 2019. Breaking it would be difficult, but shall it happens, below it, 100.00 is the obvious zone that attracts the attention of traders as the next big support area lower.
Other than these well-known technical levels and zones, there is not much to consider in this range-bound market on the monthly USDJPY chart. It would be fair to say also that USDJPY may be in for another year of this sideways price action on the long-term charts, as has been the case in the past three years.
Bonus: Here’s the same monthly USDJPY chart with a simple perspective. It shows the pair is trading in a symmetrical triangle formation since 2015. However, keep in mind, the trendlines drawn here are loosely based and therefore, breakouts may not result in significant continuation moves.
Note: Be sure to also read our broad review for currencies and other markets where we discuss the large-scale factors that may drive the long-term Forex trends. Find it 100% for FREE here.
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