Euro-dollar forecast 2021: bull market and target 1.25 with the economic recovery

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Euro-dollar exchange rate, what are the analysts’ forecasts for 2021? What the ECB did to weaken the euro kept the EUR-USD cross below 1.20 until December 2020, but the announcement of a (slight) change in European monetary policy has already pushed the dollar’s bearish trend, which according to forex forecasts will dominate 2021 due to various contingent factors: in 2021 the EUR / USD will reach at least 1.25.

eur usd forecast 2021

According to analysts, the euro will not weaken against the dollar in the next couple of years primarily due to the monetary and fiscal policy environment, which is expected to remain favorable: the gap between long-term real yields in the euro zone and the United States will continue to favor the European currency. Secondly, economic forecasts and the 2021 oulook indicate that the world economy and international trade will recover, allowing risk appetite to continue to rise.

Will the euro-dollar rate decrease or increase in 2021? The answer is practically obvious but it must be justified. The starting point is the current situation after the European Central Bank carried out a largely anticipated recalibration of its monetary policy approaches.

Euro-dollar forecast 2021: the monetary policy of the ECB will play a fundamental role

The ECB left all major interest rates unchanged after the December meeting, in line with market expectations, but announced that it will increase bond purchases with the PEPP, the pandemic-related quantitative easing program: rates on main ECB refinancing operations, marginal lending operations and deposits with the central bank remained unchanged, but the allocation of newly created euros to the Pandemic Emergency Purchase Program was increased by 500 billion euros , for a total of € 1.85 trillion.

With the Pandemic Emergency Purchase Program, the ECB buys European bonds for pandemic-related reasons: this “emergency quantitative easing” will continue at least until the end of March 2022, rather than until the end of June 2021 as originally planned. The ECB also said it will continue to buy 20 billion euros per month, or 240 billion euros per year, as expected from the normal QE activated in November 2019.

The European Central Bank is also extending the duration of its long-term refinancing operations, so that the more favorable terms remain in effect until the end of June 2022 rather than being withdrawn between June and December 2021.

EUR/USD forecast for 2021: target 1.25

All the actions of the ECB had been anticipated by analysts, economists and investors, so they did not “upset” the EUR / USD exchange rate, but keeping it below 1.20 almost all year, then in December the cross started to take the upward path already widely expected.

The monetary policy of the ECB has held back the run of the euro, however the exchange rate has increased by more than 8% in 2020 despite the pandemic, mainly due to the exodus of investors from the dollar. And it continued to rise even as the new restrictions pushed Europe’s economy into the direction of a recession.

The euro area economy rebounded sharply from its previous low in the third quarter, but is expected to contract again in the last months of the year. The Eurozone would enter a double recession if the economy contracted again in the first quarter of 2021. For many economists, however, this is unlikely.

According to analysts’ forecasts, the euro will not lose ground against the dollar in the next two years (not only in 2021, but in a broader perspective also in 2022) for three main reasons that prevail over others. Firstly, due to the monetary and fiscal policy environment which should remain favorable. Second, the gap between long-term real yields in the euro area and the US is expected to continue to favor the euro.

After that, the global economy and trade are expected to recover further, allowing risk appetite to continue to rise. The euro-dollar forecasts for the end of 2021 and the end of 2022 are respectively 1.25 and 1.30.

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