Market Overview

The single European currency seems to attract most of the investors’ attention as its share grows in both international settlements and forex reserves. The pair manifests Hegel’s philosophy of law: unity and struggle of opposites. Both components of the currency pair represent two major world economies with risk aversion that sometimes can mimic the relationship of friends and antagonists at the same time.

Market sentiment recently suggested that the Euro could rise significantly in 2021, and there is a strong background behind this expectation. The most important underlying reasons for such an assumption are rising risk sentiment in the market as the pandemic is waning, and the Federal Reserve (Fed) continues to pump liquidity in the market along with unprecedented budget stimulus measures. 

However, such sentiment is being tested by the reality of recent weeks. This situation resembles the philosophical hypothesis that states that practice is the sole criterion for testing truth. Despite all expectations, the Euro failed to reach the essential landmark at 1.25 against the Greenback. Moreover, both the Fed and the European central bank (ECB) counterwork to avoid strengthening of the single currency. ECB and the Fed emphasise that the spread of new coronavirus strains undermine economic recovery, which has slowed down and is worse than expected. The vaccination process hopes to help business activity pick-up, which may also attribute to the recovery of the economy. . In such conditions, the ECB has few reasons to strengthen the Euro. Not coincidently, the European monetary watchdog claimed it sees some room for further lowering of deposit interest rates from the current -0.5%. The possibility of the downgrade by 10 basis points is more than 70%.

The Fed promotes a pessimistic outlook on the U.S. economy while claiming that it will maintaining a loose monetary policy for a long period of time. However, no monetary stimulus measures are being considered. All known stimulus measures are already priced in. That is probably why any deliveries of the negative outlook by the Fed are not leading to a weaker Dollar, but to restoring its role as a safe haven asset. A good example is the strengthening of the Greenback after the results of the Federal Open Market Committee (FOMC) meeting were announced this week. 

On the other hand, economic growth and below zero interest rates are not in favour of the Euro. 

So, fundamentals are more facilitating to downward corrections in the EUR/USD. Nonetheless, the uptrend in the pair is still intact and the Euro may rebound after reaching strong support levels. Technical pictures suggest that strong support levels are located at 1.19700-1.20000. It may well be that these levels could be reached with a following rebound to the nearest targets at 1.22000.

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.