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Euro 1Q 2021 Forecast: Can the ECB Curb the Euro's Strength?

Euro 1Q 2021 Forecast: Can the ECB Curb the Euro's Strength?

Martin Essex, MSTA, Analyst

EUR price outlook for 1Q 2021

  • The ECB seems to have run out of ammunition in its battle to keep EUR/USD below the 1.20 level.
  • The clear break above 1.20 in December suggests the ECB is now unable to curb the Euro’s strength and that further gains are likely in the weeks ahead.
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Euro Price Gains Likely in 1Q

The European Central Bank has made clear that it does not want to see EUR/USD above the 1.20 mark, once seen as its “line in the sand” for the pair, because of the negative impact of a strong Euro on both the Eurozone’s competitive trade position and its inflation rate. Yet it is hard to see what it can actually do about it now the pair is above that level, and that suggests further strength in EUR/USD in the weeks ahead.

EUR/USD Price Chart, Daily Timeframe (January 1 – December 17, 2020)

EURUSD

Source: IG

Targeting Resistance at 1.25

A clear target for EUR/USD bulls is the 1.25 level last reached in February 2018 and there is no fundamental reason why that should not be challenged even if the ECB tries hard to subdue the Euro to lift the Eurozone’s inflation rate. After all, direct intervention in the foreign exchanges is highly unlikely.

For sure, the ECB could ease Eurozone monetary policy still further in the first few months of 2021 to counter the impact on the economy of the coronavirus pandemic, and in the past that might have weakened the Euro. However the correlation between monetary policy and the level of the currency seems to have broken down recently so further monetary measures will likely fail to bring the Euro down.

Euro May Benefit Too From ‘Risk-On’ Trades

The next question for EUR/USD traders is whether even more money will flow in 1Q from the relative safety of the US Dollar into assets seen as more risky, and that includes the Euro. Such a move seems likely as the coronavirus pandemic comes under control: another positive factor for EUR/USD. Note though that there is also a risk that the pandemic persists, leading to renewed safe-haven demand for Dollars and a pullback in EUR/USD before further strength emerges.

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--- Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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