The value of the euro (EUR) has gained 2.3% against the US dollar (USD) in the past two weeks after declining since the start of the year.
Are you considering getting your hands on the forex market’s biggest pair and wondering what the future of the EUR/USD rate looks like? Why is the euro going up right now and can it sustain the rise?
This article looks at the main market drivers to be aware of when trading the pair and analysts’ view of the EUR/USD exchange rate forecast for the next year.
What you need to know about the EUR/USD currency pair
The euro vs dollar currency pair represents how many US dollars – the quote currency – are needed to purchase one euro – the base currency.
The euro facilitates cross-border business between 19 of the 27 member countries of the European Union (EU), so the currency acts as a proxy for investors to take positions on the health of the European economy.
The US dollar as the global reserve currency is used to trade on the state of not just the US economy but the global economy. The dollar is considered a safe haven that tends to strengthen in a risk-off investment environment and weakens when investors have the confidence to sell it and trade other assets.
Factors that influence the value of the EUR/USD forex pair
As with other currency pairs, EUR/USD trading is driven by macroeconomic factors in Europe and the US, including interest rates and economic stimulus set by the European Central Bank (ECB) and US Federal Reserve, as well as gross domestic product (GDP), manufacturing output, unemployment and consumer prices.
The direction of the pair is also driven by market sentiment. Risk appetite in the financial markets affects the value of the US dollar and political concerns in the eurozone have an impact on the euro. In the past few years, the tumultuous negotiations between the EU and the UK on Brexit have led the direction of the euro.
More recently, however, COVID-19 infection rates and their impact on European economies have been the key driver for the EUR/USD pair.
EUR/USD price analysis: US Treasury volatility drives the direction
The EUR/USD trend was higher in the second half of 2020, rising from around $1.08 in mid-May to $1.23 in December as the US currency weakened against a basket of currencies on low interest rates, stimulus from the Federal Reserve and the US government, and as investors took a risk-on approach to rallying stock markets.
The dollar turned higher at the end of December on an increase in US Treasury yields and rose during the first quarter of 2021, pushing the EUR/USD rate down to $1.17 on March 30. The Federal Reserve has indicated it will tolerate stronger inflation in the short term, holding off on tightening until the labour market improves and there is a sustained rise in inflation. At the same time, the European Central Bank is likely to limit long-term rates from moving higher as it continues its monetary and fiscal stimulus.
However, as the rise in Treasuries has halted, the dollar has slipped back in relation to the euro in April, with the rate moving back to the $1.19-$1.20 range even as Europe got off to a slow start in rolling out vaccinations and is experiencing a third wave of COVID-19 infections.
Now, what do analysts predict – will the euro go up in 2021?
EUR/USD forecast: what will the chart look like?
Some analysts expect the EUR/USD pair to continue trading higher in the coming months.
Analysts at Dutch bank ING said in their euro to dollar forecast: “April has so far been a good month for EUR/USD – despite Europe still struggling with third COVID waves. It seems investors are being very forward-looking and using the recent inflection higher in European vaccination rates to draw confidence in a European recovery later in the quarter… And with little downside seen for European rates, one could argue that the EUR downside is limited too.”
Analysts at BNP Paribas Wealth Management expect the Federal Reserve to announce the reduction in asset purchases during the fourth quarter of 2021 starting from the second quarter of 2022 and a first increase in interest rates during the third quarter of 2023. They explained in their April EUR/USD outlook: “At the same time, the ECB has been more active verbally at trying to talk down the rise in eurozone yields. Yield spreads moved in favour of the USD. Nevertheless, short-term yield spreads should remain low for a long time and that should be a key negative factor for the dollar.”
The analysts added: “The euro should recover gradually as vaccines allow the European economies to emerge from the most recent string of lockdown measures. Therefore, we keep our EUR/USD target to 1.20 and 1.25 for the next three and 12 months, respectively. This suggests upside for the euro.”
The EUR/USD prediction from Canadian bank CIBC also sees the euro moving higher this year. The analysts said in their recent note: “Despite the early year growth headwinds prompting a lower EUR trading trajectory than previously assumed, we do not expect the EUR to unwind H2 2020 gains. A somewhat belated ramping up in vaccinations will help to limit macro negativity ahead.”
The bank added:
Technical EUR/USD analysis from Germany-based Commerzbank shows the pair tested the important 1.1990/1.2014 pivot: “We will need to regain this latter level in order to cast attention back to the 1.2243 March high. So far the rally remains just a correction higher and failure in the 1.1975-1.2014 band will keep attention on the downside. Nearby support lies at 1.1835 then 1.1704/1.1695.”
The short-term trend for the next one to three weeks would see the pair under pressure below 1.2014 and looking for a slide into the 1.1695/00 band. However, the long-term trend for the coming six-to-nine months targets 1.2622, the 200-month moving average, provided that 1.1570 holds from the previous downtrend.
Analysts at Citibank are more bearish, with a six-to-12 month EUR to USD forecast of $1.16 and a long-term forecast of $1.15: “We are reluctant to decidedly shift our EUR/USD downside view over the medium term.”
The analysts added:
Will EUR/USD rise?
The direction of the euro against the dollar will depend on central bank policy in the US and Europe, which will be influenced by the impact of COVID-19 infection rates and vaccinations on economic recovery.
What is the best time to trade EUR/USD?
The market is the most liquid during the day in Europe and the US, between 07:00-20:00 GMT. You can trade the EUR/USD pair through contracts for difference (CFDs) 24/7 at Capital.com.
What affects EUR/USD?
The value of the EUR/USD pair is affected by economic performance and monetary policy set by the US Federal Reserve and European Central Bank.
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.