More Upside for EUR/USD, Or is 1.20 the Limit?

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Fundamental Euro Forecast: Neutral

  • EUR/USD is back again to within touching distance of the 1.20 level that is seen by analysts as the line in the sand that has been drawn by the ECB.
  • That raises the question of whether the pair has enough momentum to break higher or whether it will fall back.
  • More likely, perhaps, is a pause for consolidation before a strong move one way or the other.

Euro price closes in on critical 1.20 level

It is now almost three months since the European Central Bank’s Chief Economist Philip Lane, and other unnamed ECB officials, effectively drew a line in the sand at 1.20 for EUR/USD, signaling that the central bank does not want to see the pair above that level for fear it would damage the Eurozone’s economic recovery.

Since then, EUR/USD has fallen as far as 1.16 but for most of this month it has been edging higher as news of coronavirus vaccines and central bank stimulus have raised hopes of an economic recovery next year. That in turn has prompted investors to shift out of the safe-haven USD and into more risky assets including EUR.

EUR/USD Price Chart, Daily Timeframe (August 19 – November 26, 2020)

Source: IG (You can click on it for a larger image)

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As the chart above shows, EUR/USD has not yet been overbought and there is no evidence that the ECB could stop the pair from appreciating further even if it wished to. After all, it is almost impossible to imagine even more monetary stimulus than is already here or on the way. That argues for a sustained breach of 1.20.

However, no trend lasts forever and the fairly steep climb from just under 1.16 at the start of this month points to at least a pause and perhaps a pullback. Overall, therefore, a period of consolidation is now arguably the most likely scenario for the next week or two.

Week ahead: Eurozone Inflation, Unemployment and Retail Sales

Against this background, economic data will continue to have less impact than usual. It is, though, a busy week ahead for statistics, with inflation, employment and retail sales numbers due for both Germany and the Eurozone as a whole; and analysts will be watching the numbers carefully for any signs of a recovery from the economic damage caused by Covid-19.

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— Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex

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