Forecast for 2021: What to expect from the euro and dollar

Forecast for 2021: What to expect from the euro and dollar

If someone asks which currency pair is the most important and liquid in the Forex market, the answer will be immediately. Even a beginner will say, “Of course, EUR / USD”. There is even no doubt about it: the trading volume of this pair reaches 1.1 trillion dollars per day. These currencies represent the two most powerful economies in the world, and the US dollar is the first major reserve currency. Most central banks still hold large amounts of their gold and currency reserves (more than 60%) U.s. $. The euro is in second place with more than 22% of

 

It should be noted that the dollar is gradually losing its positions, according to Bloomberg, its peak (45.3%) global payments in April 2015. Now, according to SWIFT statistics, the euro has managed, albeit not significantly, to bypass the dollar. In October 2020, 37.8% of transfers handled by this system were in euros, while the dollar’s share was 37.64%. (The British pound came third with a huge margin of 6.92%).

Despite the weakening of the US currency, it is certainly too early to bury the dollar. The Bank for International Settlements (BIS) announced in the summer of 2020 that about 50% of cross-border loans and international bonds are denominated in USD. Finally, about half of all trade invoices in the world are issued in dollars, even for non-U.S. trade.

And let’s not forget that market analysts assess the strength of different currencies when looking at the US Dollar Index (DXY). In fact, it is a basket of monetary units of six countries whose value is compared with the USD. And the euro has the lion’s share of 57.6% in it (the remaining 5 represent only 42.4%).

All the above statistics clearly indicate that EUR / USD is number 1 among the main pairs in the Forex market. It is this pair that sets the main trends for other currencies. And that’s why every entrepreneur needs to know and understand what happened to him, happens and will happen.

 

A Bit of History

Surprisingly, despite its importance, the EUR/USD pair is quite young. The euro emerged through the creation of the European Union in 1992, first in non-cash form, and only on 1 January 1999 officially replaced the remaining currencies European. A few more years passed, and in June 2002 the EURO became the only means of payment in the euro area, crowding out the then favourite, the German mark (USD/DEM) from cokestu.

This event was preceded by two others, which had a significant impact on the development of the subsequent EUR/USD exchange rate. The first is an interest rate cut by the US Federal Reserve in the late 2000s, and the second is a series of four coordinated terrorist attacks, the largest in human history, committed in the United States on September 11, 2001, including the destruction of the twin skyscrapers of the World Trade Center in New York. As a result, after starting at $0.93 per euro, the pair rose to 1.60 in mid-2008. In other words, the dollar lost more than 70% against the euro. However, the European Central Bank (ECB) did not want the euro to be so strong because it posed serious problems for European exports and was a blow to the trade balance. Therefore, verbal intervention has started on the market. In addition, there was consistent positive news from the United States regarding the state of the country’s economy, as a result of which the EUR/USD pair began to move south and recorded a low level of the second decade of the 21st century near the level of 1.032 at the end of December 2016.

Many analysts predicted fast parities of 1:1, but this did not happen. And now the European currency is quoted in the area of 1.22 dollars for 1 euro.

What happened: Year 2020

10100 Exactly one year ago we published expert forecasts from the world’s leading banks regarding the EUR/USD exchange rate for 2020, and now we can decide which one was right and to what extent.

So in December 2019, analysts at Deutsche Bank, Goldman Sachs, Bank of New York Mellon and many other banks reached a consensus, predicting a fall in the US dollar in 2020. The main reason was the slowdown in global economic growth. In addition, it was anticipated that on the eve of the presidential election, the US Federal Reserve, under pressure from Donald Trump, would continue to cut interest rates, or at least keep them at their current levels.

Both of these forecasts have been completely correct. If at the end of 2019. the DXY dollar index fluctuated around 97 and fell after 12 months less than 90 points. The interest rate also decreased: in December 2019 it was 1.75%, at the beginning of March it was lowered to 1.25% and then completely reduced to 0.25%.

Withdrawal that in December 2019 reported only the first outbreak of COVID-19 in Wuhan, China, and there was no idea of a global pandemic. But even then, the Financial Times published a forecast by Citigroup experts that quantitative easing (QE) policies pursued by the U.S. Federal Reserve and pumping the market with cheap dollar liquidity could cause the dollar to fall. Citigroup’s colleagues were supported by analysts at Swiss bank Lombard Odier, as well as one of the world’s largest investment firms, BlackRock. This scenario also came true 100%, and the coronavirus pandemic played a role as a catalyst for this process: almost a quarter of all existing dollars were spent in just one last year.

Some conspiracy theorists claim that coronavirus was deliberately invented to implement a secret world government plan and help financial elites take out most of the dollar’s liquidity on the cheap. But baring all kinds of conspiracies is not the purpose of this review. Therefore, let’s go to specific numbers and see whose forecast turned out to be the most accurate.

According to Bloomberg, the consensus forecast of the largest market operators suggests that by the end of 2020 the US dollar will “lose weight” by another 400-500 points and the EUR/USD pair will rise to 1.16 points.

JPMorgan Chase specialists predicted a level of 1.14 for this pair at the end of 2020. Goldman Sachs and Bank of America Merrill Lynch named 1.15. Germany’s Deutsche Bank and France’s Societe Generale pointed to $1.20 per euro. The last two forecasts turned out to be the most accurate: the pair reached a high of 1,225 at the end of 2020. (Recall that all these scenarios did not take into account the consequences of the blow that COVID-19 dealt to the economy.)

 

What will happen: 2021

Some experts believe that for the United States the beginning of COVID-19 can be compared with the Third World War: more than 300 000 dead, a third of the working population remains without a permanent source of income. The pandemic hit the country at the end of a 10-year cycle of economic growth and in the year of presidential elections. Additional pressure on the economy has been exerted by the trade wars that Donald Trump has unleashed with China and Europe, as well as an increase in the supply of the dollar.

In 2021, the money is likely to flow actively into Europe and the dollar will face a deep devaluation. True, different analysts estimate the depth of a possible usd drop differently.

For example, Goldman Sachs expects the weighted USD to fall by only 6% in 2021, while Morgan Stanley expects the EUR/USD pair to rise from its current levels to 1.25. (By the way, the number 1.25 also sounds in many other moderate forecasts.)

But there are also those who predict a catastrophic fall in the US currency. Prominent economists, Euro Pacific Capital chairman Peter Schiff and former Morgan Stanley Asia boss and Fed Board member Stephen Roach estimate the probability of a 50% dollar collapse in 2021. At the same time, Roach believes that the devaluation of the dollar could reach 35%. A slightly smaller but also impressive 20% devaluation is forecast by Citigroup analysts. This means that they believe that by the end of next year we are seeing a EUR/USD pair in the 1.40-1.44 zone.

What can stop the dollar from falling?

Naturally, the tightening of the Federal Reserve’s monetary policy. As of today, long-term inflation expectations have already jumped to 1.85%, which is not far from the regulator’s target of 2.0-2.5%. This inflation leads to the depreciation of the dollar. And at some point, in order not to collapse definitively, the Fed will be forced, albeit with great reluctance, to stop pumping the economy with cheap money and start a cycle of raising basic interest rates.

By the way, Europe, perhaps even more than the US, is interested in halting the growth of the EUR/USD pair.

Since mid-March 2020, the euro has strengthened almost continuously against the dollar. This is despite the fact that the ECB has printed more than €2.2 trillion in a year and set negative interest rates.

There are calculations indicating that the 10% strengthening of the euro area reduces euro area GDP by around 1%. Imagine that the EUR/USD pair will rise to 1.40, as predicted at Citigroup. Such an increase would put all European exports in a blow. Who will then buy goods from the EU after a quick rising prices? 

The ECB already had a chance to weaken the euro against the dollar. However, this has not happened: the European regulator has decided not to interfere in foreign exchange markets and simply to limit ourself to ‘exchange rate monitoring’. However, according to many analysts, with the pair rising to 1.25, the ECB will be forced to take very serious steps to limit further growth in its currency. And it is quite possible that another EUR 2 or 3 trillion aid programme for the EU economy will be adopted in the near future. And in the wake of Europe, similar steps will be taken by the central banks of the UK, Canada, China and many other countries. And if 2019-2020 can be called a time of trade wars, then 2021 will be a time of currency war.

Although … most likely we will see both wars at the same time.

Happy New Year, 2021! It promises to be very interesting!

 

NordFX Analytical Group

 

Note: These materials are not investment recommendations or guidelines for working in financial markets and are for informational purposes only. Trading on the financial markets is risky and can result in a complete loss of deposited funds.