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COVID-19 hits the outlook again and the shared currency weakened against the US dollar, moving from 1.1900 to 1.1744 in September. Therefore, the European Central Bank (ECB) may ease again but as fiscal uncertainty should clear, economists at MUFG Bank expect the euro trading higher in 2021.

Key quotes

“As we expected, the euro corrected lower in September which has reinforced our belief that EUR/USD is in a consolidation phase within a broad range of 1.1600-1.2000 for now.”

“Based on communications in September we believe the risks are rising of additional monetary easing by the ECB in response to the increased downside risks to growth. With inflation moving the wrong way and COVID-19 risks rising, the justification for extending the PEPP program could increase further, especially given the additional APP purchases will cease in December.”

“There has been some increased uncertainty over the agreed EU Recovery Fund with negotiations taking place over a ‘rule-of-law’ clause to ensure only responsible governments obtain funds. Poland and Hungary want greater clarification on the working of the clause. We do not expect any delay and assume agreement will be reached to ensure national parliaments legislate in time for the start of 2021.”

“Assuming no severe COVID-19 escalation that causes severe economic damage, we expect EUR to continue to consolidate before advancing next year driven mainly by the Fed’s looser monetary stance and spreads moving favourably for the euro.”