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During January, the euro weakened against the US dollar, moving from 1.2228 to 1.2139. In the view of economists at MUFG Bank, EUR/USD correction lower will not last.

Key quotes

“We could well see the correction extended further into February and returning to levels below 1.2000 for a period is certainly plausible. There is a strong seasonal bias favouring EUR weakness in the early part of the calendar year, especially when there have been gains in the final period of the previous year. But the fundamental justification for this correction turning into a more sustained move is less compelling.”

“The ECB’s own December projections highlighted the relatively small impact EUR gains had on inflation. We don’t dismiss the concerns the ECB have – but this should be viewed as pointing to action, but at EUR levels notably higher than where spot trades now.”

“COVID-19 vaccination roll-outs across the eurozone remain well below the UK and the US and with social unrest fuelled by anger over COVID-19 restrictions escalating, there is a real urgency for a quickening of roll-outs. Our current assumption is this is more the eurozone being behind the curve in signing deals but that this will become less of an issue in the coming month or so and we should begin to see catch-up that alleviates concerns over any considerable divergence in timings of lockdowns being reversed. Hospital capacity is also less of a problem across the eurozone.”

“We do not see any of the apparent factors weighing on EUR sentiment are credible in reversing the appreciation trend. Rotation into non-USD assets as global growth picks up still appears a plausible scenario that will help support EUR going forward.”