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EURUSD forecast for 21.07.2020

July 21, 2020

July 21, 2020

EUR/USD forecast: Euro sets ambitious targetsDmitri Demidenko

Fundamental Euro forecast for today

There should be great changes in the euro-area bond market

When in 2017 the euro surged by 14% against the US dollar, its main growth drivers were the victory of Emmanuel Macron in the presidential elections in France, the leading pace of the euro-area GDP growth over the US growth, and Mario Draghi’s hints at normalizing of the ECB monetary policy in Portuguese Sintra. The eurosceptics in Paris were defeated, which laid the foundation for the [ EUR/USD][1] uptrend. The current situation has a lot in common with that occurred 3 years ago, which suggests an optimistic outlook for the euro future.

Following five days of bitter debates, the French-German emergency stimulus plan has been approved by the EU. The grants are limited to €390 billion, cheap loans will be €360 billion, the debt will be repaid from the EU budget by 2058, and almost a third of the attracted resources are planned to be used to combat climate change. The Frugal Four managed to reduce the proportion of grants and the frugal nations are willing to strictly control the use of grants.

The euro-area financial markets have been supported by the agreement reached by the EU countries. Italy-Germany 10-year yield spread has been the narrowest since March. The stock indexes have been up amid the news about the agreement on the grants.

Dynamics of Italy-Germany bond yield spread

![LiteForex: EURUSD forecast for 21.07.2020][2]

Source: Bloomberg

In my opinion, the agreement on the French-German recovery plan is more important than Emmanuel Macron’s victory in 2017. Yes, the eurosceptics were defeated in both cases, and the euro area is again united, however, the issue of joint bonds is a breakthrough for the entire European debt securities market. The volume of the triple-A assets in the euro-area bond market will increase to €1.4 trillion. Treasuries will have a strong competitor. Besides, the ECB and the EU support for the euro-area peripheral countries will make their papers really appealing for investors.

The currency market and the equities market also face radical changes. European stock indices have been trading at a discount compared to their US peers for a long time, also because investors considered the risk of the euro area breakup. Now, the [EuroStoxx][3], the [DAX][4], and other European stock indices should be growing. Besides, the capital inflow to the euro-area financial markets should support the euro strengthening. At the same time, the euro’s share in the world’s central banks’ FX reserves should be also increasing. Furthermore, the current account surplus suggests the Pictet Asset Management opinion about the undervaluation of the[ EUR/USD][1] looks quite reasonable.

There are more parallels with 2017. In 2020-2021, the euro area can well outperform the USA in terms of the GDP growth, and its rapid economic recovery will not require the ECB to expand QE. The talks about an early end European QE sound like Mario Draghi’s suggestions in Portugal. History not only repeats itself but often rhymes. That is why I should increase my[ December forecast][5] for the[ EUR/USD][1] from 1.16 to 1.17 at the end of 2020. In 2021, the euro can well rise above $1.2.

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Price chart of EURUSD in real time mode

![EUR/USD forecast: Euro sets ambitious targets][8]

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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  2. cdn.liteforex.com/cache/uploads/blog_post/eurusd/bonds-ita-ger-21-07-20.jpg?w=30&s=4bc1dc3dc8ab7004dcd9b4da029ca6ef
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  5. www.liteforex.com/blog/analysts-opinions/forex—2020-forecasts-and-outlook/
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