The uncertainty surrounding the outlook for the US and European economies for the remainder of the year, as they emerge from Covid-19 lockdowns, is likely to keep the euro to dollar trend volatile in the coming months.
The euro vs dollar forex pair is one of the most frequently traded on the currency markets. The US dollar is the global reserve currency and tends to rise during times of economic uncertainty as it is considered a safe-haven asset.
The euro was initially intended to rival the US dollar as a reserve currency, but economic and political troubles in the eurozone and the dominance of the US have prevented it from taking that position. Still, the high volume of trade that takes place internationally using both currencies makes the EUR/USD pair the most liquid forex instrument in the world.
Read on for an overview of the factors influencing the movement of the euro to American dollar pair, the latest EUR/USD forex news and the EUR/USD outlook to provide direction for investors’ trading positions.
The basics: what investors need to know about the EUR/USD currency pair
The euro-dollar currency pairing represents how many US dollars (USD) – the quote currency – are needed to purchase one euro – the base currency.
The euro is the single currency used by 19 of the 27 member countries of the European Union (EU). It facilitates cross-border business between the countries, and as such can be traded as a way to take a position of the health of the European economy.
As the global reserve currency, the US dollar strengthens in a risk-off investment environment and weakens when investors feel confident in trading it for other assets.
EUR/USD projections offer investors a view of expectations for the wider international economy and present an opportunity for portfolio diversification.
Factors that influence the value of the EUR/USD forex pair
The key drivers to look for when trading the EUR/USD pair are sentiment-driven: risk appetite on the global financial markets directs the movement of the US dollar and political concerns in the eurozone affect the direction of the euro. Uncertainty created by negotiations between the EU and the UK over the implementation of Brexit has had an impact on the euro in recent years.
Investors should also consider the impact of the European Central Bank (ECB) and US Federal Reserve policy on interest rates and fiscal stimulus, as lower interest rates make investment less attractive. Macroeconomic data, including GDP, unemployment rates, manufacturing and services output and consumer price indices, offer measures of economic health that also influence the currency market.
EUR/USD analysis: government stimulus drives turbulent price swings
The euro versus dollar exchange rate has largely been trending lower in the past two years on slowing economic growth and US dollar strength. The EUR/USD rate was expected to rise in 2020 on increased optimism about the global economic outlook with the US and China coming to an agreement on trade tariffs.
The euro continued to decline after it started the year at 1.12 against the dollar, but there are signs that it has reached a turning point after it saw wild swings in March that took it to a near three-year low. The euro climbed to a one-year high of 1.14 in early March as the dollar weakened and the entire US Treasury yield curve plunged below 1 per cent for the first time, as concerns about the effect of the Covid-19 pandemic on the global economy began to hit the financial markets and investors sought the safety of government bonds.
The EUR/USD rate then dropped later in March to 1.07, its lowest level since April 2017, as it was the turn of European bond yields to drop in response to emergency stimulus measures introduced by the ECB. An unwinding of positions across the financial markets prompted a flight to safe-haven assets, including the US dollar. The pair subsequently rebounded to 1.11 at the end of the month, and has since stabilised in a tight 1.08-1.09 trading range.
EUR/USD forecast for 2020 and beyond: what will the chart look like?
Given the uncertainty in the macroeconomic outlook, investors are looking for guidance as to the euro to dollar forecast. Technical and fundamental indicators point to the upside for the currency pair going forward.
“The analysis does not suggest a drop in the medium term,” Societe Generale said in its daily technical report on May 19. “The cross is in a phase of technical recovery. It is above its 50-day moving average but the latter is poorly positioned.”
The bank’s EUR/USD prediction 2020 provides the technical levels to watch. “In the event of a correction, the first support is at 1.06 USD, before a test of 1.05 USD in the case of a breach. To the upside, the resistance at 1.1 USD is intermediary before the strong level of 1.11 USD.”
“Second waves of crisis, trade wars and the ECB’s future reaction function likely keep EUR soft near term and upside capped medium term despite a lot of bad news in the price. We maintain a range bound view for EUR/USD over 12m,” said Citibank in its weekly forex report. The bank’s EUR/USD prediction calls for the pairing to average 1.08 over the next three months, rising to 1.12 in 6-12 months and 1.20 in the longer term.
Analysts at CIBC also expect the EUR/USD pair to rise over the long term. “While euro sentiment remains compromised by the lack of political coherence, we’ve seen the ECB taking action by expanding its balance sheet. However, that move has been dwarfed by the additional supply of USD currently being injected into the market, which remains supportive for the EUR/USD pair.”
“The widening in UST-Bund spreads, by roughly 100 bps since the beginning of the year, has effectively reduced the Greenback’s allure,” the CIBC analysts noted. “With previous US growth and spread-based advantages being pared back, we expect positive fund flows, due to the perpetuation of the eurozone current account surplus, to point towards modestly benefitting the euro – despite elevated political strains.”
CIBC’s most recent EUR to USD forecast puts the pairing at an average of 1.11 during the second quarter, rising to 1.14 in the fourth quarter of 2020 and 1.16 by the fourth quarter of 2021.
Natixis Research expects a return of inflation in the eurozone in 2021 because of a “decline in productivity and the increase in unit production costs due to the new health standards taken because of the coronavirus pandemic”, it said in a recent note.
“The upturn in expected inflation, which is currently very low, would lead to a rise in long-term interest rates.” That rise in interest rates would, in turn, be supportive to the euro against the US dollar.
Trade Euro / US Dollar CFD
Trading CFDs gives you the opportunity to hold a long position, speculating that the price will rise, or a short position, speculating that the price will fall. Therefore, no matter whether you have a positive or negative view of the EUR/USD forecast, you can still try to profit from future price movements.
Always stay on top of the latest EUR/USD news with Capital.com to spot the best trading opportunities.