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New lockdowns across the Eurozone are set to weigh on activity in the coming months, explained analysts at Wells Fargo. They look for the European Central Bank (ECB) to announce a €500B increase in Pandemic Emergency Program purchases (PEPP) at its next meeting in December. They forecast EUR/USD at 1.2300 over the medium-term with risks tilted to the downside. 

Key Quotes: 

“Following an encouraging initial economic upswing during the European summer, the Eurozone economy is on the verge of relapse in activity in the fourth quarter.”

“New lockdown restrictions across major Eurozone economies are set to weigh on activity in the coming months and, despite a large Q3 gain, we now expect Eurozone GDP to contract 7.4% in 2020.”

“We believe the European Central Bank will increase its asset purchases under its Pandemic Emergency Purchase Program in December. We also expect the duration of that program to be extended to the end of 2021.”

“Monetary and fiscal stimulus measures should filter through to the real economy and have a positive impact on Eurozone growth. In 2021, we forecast the Eurozone economy to expand 3.7%; however, in the near-term, we expect easier monetary policy and lingering uncertainty over the outlook to keep the euro restrained.”

“For the time being the euro is likely to remain relatively restrained, especially considering the existing build up in long FX positions. The risks to our medium-term EUR/USD exchange rate forecast of $1.2300 by early 2022 may also be tilted to the downside.”