Thinned activity ahead of the Christmas break and over-crowded trades likely contributed to the pullback in EUR/USD this week. Economists at Rabobank expect the pair to extend these pullbacks towards 1.20 in the first months of 2021 before moving back to 1.23 in 12 months.
Key quotes
“EUR/USD can make further headway on the upside in 2021 given that the spread in real interest rates between German and US long-term interest rates moved in favour of the EUR this year. That said, as the reality of poor economic data set in, we see scope for a pullback to EUR/USD 1.20 in Q1 before the currency pair edges up to 1.23 in 12 months.”
“If the ECB is successful in raising inflation expectations over the medium-term, relative real interest rates between the US and the Eurozone may reset in favour of the USD. However, the recent inflow into Tips suggests that inflation concerns are more discernible in US markets.”
“If Eurozone inflation remains stubbornly low, higher nominal yields in the US could also reset the real interest rate differential. Given the Fed’s guidance, this too could be some way off. At the shorter end of the curve, a cut in the ECB’s discount rate could undermine the EUR, but for now it would appear that the EUR is not strong enough to override policymakers’ concerns related to the use of negative interest rates for a prolonged period.”
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