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The Federal Reserve will take the baton from the Eurpean Central Bank as the major influence for EUR/USD this week, with its policy announcement on December 16. While economists at Rabobank expect broad-based USD weakness to run further in 2021, EUR/USD has been in a consolidation phase since December 3 and the Fed outcome could provide a fresh trigger. 

Key quotes

“At the very least the market is expecting the FOMC to produce more clarity on forward guidance. Given that US economic recovery is losing momentum and that a fresh fiscal package is still awaited from Congress, we see a chance that the Fed could go beyond forward guidance this week. That said, our central view is that the Fed will wait until outstanding issues surrounding the election have been cleared and hopefully until there is more fiscal stimulus in place before taking further policy stimulus.”

“The fact that the market is long of the EURs suggests that there is room for profit-taking in EUR/USD particularly given the worries that will arise from Germany’s fresh coronavirus restrictions and given the fact that economic data are likely to worsen before they improve next year.”

“While we see risk of a souring in risk appetite triggering a dip towards EUR/USD 1.18 in Q1 2021, we have revised up our forecasts for EUR/USD moderately across the board. Our 12-month EUR/USD forecast now stands at 1.23 from a previously forecast of 1.20.”