Euro 1Q 2021 Forecast

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 Eurozones 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.

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 Eurozones 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.