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EURUSD Forecast – Where Will the Common Currency Go Next?

Posted: Monday, November 16th, 2020

Estimated Reading Time: 3 minutes

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To make a EURUSD forecast for the rest of the year is a daring task. The pair moves in a tight range since August, with the 1.19 level acting as a pivot.

In the two instances when it managed to trade above, the ECB stepped in and delivered a verbal intervention. The trend continues, as even today Luis de Guindos, the ECB Vice-President, mentioned the high EURUSD exchange rate as a concern. When he did so, the Euro traded way below the 1.1850 against the U.S. dollar.

A study by Nordea and Macrobond reveals the difficulty of a EURUSD forecast. On the one hand, the trade-weighted Euro is at its strongest level ever in nominal terms. On the other hand, the average 76-16 points towards a decline to below 1.15.

Will the ECB December 2020 be easing weigh on the EURUSD exchange rate?

EURUSD Forecast

Bullish and Bearish Factors to Consider On Any EURUSD Forecast

Last week’s ECB Forum on Central Banking brought together the heads of the most important three central banks in the developed world. Lagarde, Powell, and Bailey from the Bank of England discussed the challenges ahead for the rest of the year.

A Bullish EURUSD Case

On the hawkish side, Lagarde reiterated the willingness of the ECB to ease further in December. However, she did rule out another rate cut in the deposit facility rate, propping the EURUSD rate back above the 1.18 mark.

Another positive for the common currency is the above-mentioned strength in nominal terms. The ability (and stubbornness) of the EURUSD rate to trade at such high levels has different interpretations. For example, it may mean that the ECB, with its verbal interventions, tries to stabilize the EURUSD, not to weaken it as the FX pass-through inflation has lost its significance lately.

A Bearish EURUSD Case

On the dovish side, the ECB may surprise by further lowering the TLTROs interest rate. As a reminder, the ECB offers TLTROs to -1%, well below the deposit facility rate of -0.5%. In other words, the dual system seems to appeal to the ECB as the bank mentioned multiple times that the TLTROs are a success story.

Therefore, by offering even more favorable lending conditions via the TLTROs, the ECB hopes to ease financial conditions further. In this scenario, a EURUSD forecast needs to consider the possibility of a EURUSD exchange rate close to 1.15 toward the end of the trading year.

Another negative for the EURUSD exchange rate may come from the Recovery Fund. Hungary and Poland blocked the 2021-2027 EU budget and financing. Without ratification from all member nations, the Recovery Fund EUR750 billion cannot be used.

COVID-19 Vaccine – The Wild Card

Last Monday, the world found that a COVID-19 vaccine developed by Pfizer-BioNTech efforts has an efficacy of 90%. Today, Moderna, a U.S.-based pharmaceutical company, released the data on its vaccine. This one shows 95% efficacy. As such, the light at the end of the tunnel is growing as the world sees a way out of the crisis.

With only five trading weeks left until Christmas, expect volatility to rise the closer we get to the ECB decision in December. Those arguing for a EURUSD forecast above 1.20 by the end of the year should note that the ECB will likely keep intervening the closer the pair comes to the round number. On the other hand, those looking for a EURUSD forecast to 1.15 and below should watch developments on the COVID-19 vaccine.

All in all, the markets are set for an intense end of the trading year. Will the ECB overdo it in December? Or it will step back now that the prospect of a vaccine changed the optic?

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