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The European Central Banks, as expected, kept its monetary policy unchanged on Thursday. The EUR/USD jumped on headlines saying that the ECB agreed that there was no need to overreact to the euro gains, point out analysts at Danske Bank. They continue to expect a new test of 1.20, seeing 1.23 in three months. 

Key Quotes: 

“The impact of FX was downplayed in Q&A. Lagarde did say they had discussed FX’s impact on inflation but we take note that she did not mention they had concluded it was a major factor as such. This may be especially so as EUR strength is a natural consequence of more upbeat macroeconomic projections. We expect the debate about where spot is fixing and how it may affect ECB communication to subside from here on.”

“Upgraded macro forecasts and still few details about the strategic review leave EUR/USD to be set by the big picture for 2021. We continue to see a global recovery, activity at a pre-COVID level by mid-2021, a Brexit resolution and fairly benign global political situation (e.g. trade). Thus, risks appear tilted to the upside in EUR/USD and next week’s Fed meeting will likely provide a test of 1.20 in spot.”