CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 87.41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Scan to Download iOS&Android APP

EUR/USD forecast: torn between ECB, Fed and Delta fears

By Capital.com Research Team

13:50, 25 August 2021

Share this article

Subscribe to Weekly Highlights

The major market events for the week ahead right in your inbox. Subscribe
EUR/USD banknotes
EUR/USD Source: Shutterstock

While the US and eurozone both enjoy strong and stable currencies, the US dollar is well known for its safe-haven dynamics as the global reserve currency. The dollar moves opposite to the market risk sentiment, surging when it’s off and falling when it’s on.  

Both the US and the eurozone made it to the world’s three biggest economies list, with Europe falling behind the US and China. The EUR/USD pair falls into the ‘majors’ category of the FX market and was the world’s most-traded forex currency pair in 2020 by share of total trades, according to Statista

Where is EUR/USD now?

The European currency remains weak against its US rival, declining 4.46% year-to-date and struggling to gain momentum. The pair reached the year peak at 1.23495 on 6 January, followed by a series of lower highs and lower lows, leading EUR/USD into the first dip of 1.17041 on 31 March.

The pair partially recovered losses, before plunging 2.18% to another dip of 1.18471 in just three days following the US Federal Reserve meeting on 15 June, which gave a boost to the greenback. Since then, EUR/USD has been declining further, currently trading at 1.17383, the lowest level since April. 

EUR/USD drivers: US Federal Reserve, ECB, Delta variant

The key factors at play in the EUR/USD pair price action are the moves from the US Federal Reserve and the European Central Bank (ECB), and how the two central banks are shaping the monetary policy. As the global pandemic hit world economies, both central banks tightened policy by cutting interest rates to record-low levels and boosting bond-buying programmes to unprecedented amounts. 

Yet as inflation is surging in the US, reaching a 13-year high of 5.4% in both June and July, an interest rate hike may come sooner than expected. In June this year, the US Fed’s dot plot revealed that more members now favour an interest rate hike by 2023 than was previously anticipated, which pushed the US dollar index 1.96% higher in just three days following the announcement.

Apart from an interest rate hike, there is growing anticipation about when the Fed will start to taper off its $120bn bond-buying programme. Recently published minutes from the Fed’s July meeting revealed that the US central bank may start to wind down its monetary support as soon as this year. 

Not all members are on board with the policy tightening, however. Some would prefer to slow down the asset purchasing “early next year”, amid concerns about the job market, which is still short of its pre-pandemic levels, and the fast-spreading Delta variant that could “damp the economic recovery”. 

The tapering of the monetary stimulus may spark a risk-off sentiment in the markets, as optimism is likely to be partially boosted by the Fed’s support. In theory, the risk-off sentiment would give the greenback a push up, because the currency is serving as a safe haven during market downturns, which in turn would push EUR/USD lower. 

Following the Fed’s minutes release, the dollar index surged to 93.729, the highest level since November last year. Delta variant woes may be another factor playing into the dollar’s strength, because they are boosting the risk-off sentiment, helping the USD consolidate around the current year’s top. 

ECB maintaining dovish stance

On the other side of the Atlantic, the European Central Bank has been a lot more dovish. In July, the bank upgraded its policy guidance, stating that no interest rate hike would be expected until the 2% inflation target is achieved for a prolonged length of time. 

This is a change from the previous stance whereby a rate increase would be possible if the ECB saw “inflation outlook robustly converted to a level sufficiently close to but below 2% within its projection horizon”. Earlier in the month, the bank also revealed its new strategy review, revising the inflation target from “below but close to 2%” to “symmetric to 2%” – the first strategy change in almost two decades. 

EUR/USD

1.05 Price
+0.140% 1D Chg, %
Long position overnight fee -0.0084%
Short position overnight fee 0.0024%
Overnight fee time 22:00 (UTC)
Spread 0.00010

USD/JPY

134.34 Price
-0.750% 1D Chg, %
Long position overnight fee 0.0047%
Short position overnight fee -0.0130%
Overnight fee time 22:00 (UTC)
Spread 0.014

AUD/USD

0.68 Price
-0.260% 1D Chg, %
Long position overnight fee -0.0052%
Short position overnight fee 0.0005%
Overnight fee time 22:00 (UTC)
Spread 0.00014

GBP/USD

1.23 Price
+0.290% 1D Chg, %
Long position overnight fee -0.0042%
Short position overnight fee 0.0003%
Overnight fee time 22:00 (UTC)
Spread 0.00060

During the press conference following the meeting, Christiane Lagarde stressed that September’s forecasts could be more indicative of the outlook. As happened with its US peer, the ECB expressed concerns about the Delta variant, highlighting the uncertainty it’s bringing. 

The EUR/USD reaction to the ECB meeting was limited, with the currency pair falling 0.17% on the day.

EUR/USD outlook: analyst views

The ECB’s dovishness sets it apart from the Fed and puts the European currency in an unfavourable position against its US rival, according to Ben Carter, global capital markets analyst at Validus Risk Management.  

“With lots of talk around the Fed beginning to taper its purchases before year-end, the euro may struggle to gain any ground against the US dollar over the next few months as Lagarde comments that inflation has picked up but remains subdued,” Carter told Capital.com.

Yet some analysts have positive EUR/USD predictions and foresee a bullish price action in the pair for the coming months, despite the US dollar’s strength across the board, which might keep the EUR/USD upwards move limited in the short term. 

On 19 August, analysts at Rabobank highlighted that there are multiple factors sparking risk-off sentiment, helping to boost the USD further. “In the G10 space, much of this has been linked with Fed tapering fears,” Rabobank’s Jane Foley said in a note to clients.

“However, we would argue that there are other factors also in play. Underpinning the fall in risk appetite are concerns about the Delta variant and potentially also uncertainties about the implications of the news from Afghanistan,” Foley added.

Her EUR/USD forecast on a three- to six-month perspective remains at 1.1600.

In a note to clients on 18 August, the global FX research team at JP Morgan lowered its EUR/USD forecasts “on clearer prospects for monetary policy divergence by 1 cent across the horizon”. The new target for the pair is 1.15 by mid-2022. 

According to data from FXStreet based on 37 analysts’ ratings, the average one-month price target for EUR/USD is 1.1779, with 61% bullish sentiment. The one-quarter average price target is pointing to 1.1808, with 64% bullish sentiment.

Note that analysts’ predictions are often wrong. You should always conduct your own research before making any investment or trading decision.

EUR/USD price targets; Source: FXStreetEUR/USD price targets; Source: FXStreet

EUR/USD: technical analysis

As the price is on a fresh recovery from the lows around 1.1670, a consolidation above the 50-hour simple moving average (SMA) is taking place. The 200-hour SMA is at 1.1730, which coincides with an area where the EUR/USD pair consolidated between 12 and 13 August. Critical resistances are around 1.1703, the high seen on 19 August, 1.1730, the 200-hour SMA, and 1.1754, the high seen on 11 August.

To the downside, the next supports are set in the levels of 1.1665, the low seen on 19 August, 1.1620, the low seen on 25 September 2020, and 1.1527, the low seen on 10 September 2020. 

EUR/USD chart; Source: TradingViewEUR/USD chart; Source: TradingView

FAQs

Will EUR/USD go up?

According to data from FXStreet based on 37 analysts’ ratings, the average one-month price target for EUR/USD is 1.1779, with 61% bullish sentiment. The one-quarter average price target is pointing to 1.1808, with 64% bullish sentiment.

What is the best time to trade EUR/USD?

The best volumes witnessed in the forex sphere are seen in the European and American sessions, specifically between 07:00 and 20:00 UTC, depending on the winter and summer time zone change in the northern hemisphere.

What affects EUR/USD?

The direction of EUR/USD depends on two critical factors for the weeks and months ahead: the US Fed’s and ECB’s monetary policies and the spread of the Delta variant. Plus, the risk-off sentiment, which favours the greenback, may keep weighing on the EUR/USD pair.

Rate this article

Share this article

The difference between trading assets and CFDs
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.
Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

Latest Forex news

Still looking for a broker you can trust?

Join the 475.000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading