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Economists at Westpac think is hard to argue against a firmer EUR as manufacturing resilience offers hope but there will be plenty of area of restraint. All in all, the EUR/USD pair is set for a potential move towards 1.30 in the first quarter of the next year. 

See: EUR/USD targets the 2018 peak at 1.2556 – Commerzbank

Key quotes

“The new US administration is likely to be more collaborative with the EU, turning the tide in trade relations after the hostile escalation of tensions during the Trump Administration. Although the EU may start to regulate against the tech giants, the initial thawing of relations, especially in the aerospace sector, is likely to add a further leg of support for EUR.”

“Eurozone nations are extending or imposing more stringent COVID-19 related restrictions into at least mid-January. This highlights the potential for serial periods of tighter restrictions until vaccination programs meaningfully protect the population. Such a situation is unlikely until H2 21. However, recent production data and new order components of the PMIs suggest that prospects for manufacturing are positive for 2021. Eurozone should benefit from the rapid recovery in China and N.E. Asia more than the US.”

“A firming EUR, on the back of prospective manufacturing strength and the eventual unwinding of restrictions will hinder attempts from ECB to lift inflationary expectations. Jawboning may become more prevalent in attempting to cap EUR. However, the drivers of capital and trade flows are likely to leave ECB facing a higher EUR and yet further extensions to its forward guidance.” 

“EU is now set to implement its Recovery Fund, but implementation may prove to be a lengthy process. Nevertheless, it will provide support to national fiscal expansion and reduce pressure on ECB, but also lift EUR prospects by providing greater confidence across the region. EUR/USD has solidly moved through resistance around 1.20 and appears to be well supported for potential moves towards 1.30 in Q1 2021.”