Euro price forecast 10 December 2020

2020-12-10

Euro is doomed to success. Forecast as of EURUSD 10.12.2020Dmitri Demidenko

The [EURUSD][1] could roll down because of the correction of the US stock indexes or a no-deal Brexit but not the European central bank. Let us discuss the Forex prospects and make up a trading plan.

Monthly euro fundamental forecast

The first pandemic wave damaged badly financial markets; the second wave, more destructive, has not affected the markets much. On the contrary, the world stock indexes are growing amid the hopes for vaccines. The associated confidence in the rapid recovery of the global economy in 2021 makes investors search for alternatives to the US assets, supporting the money outflow from the US and weakening the US dollar. The paradox is the [EURUSD][1] rally presses down the euro-area exports. The great share of exports in the European GDP doesn’t allow rapid growth of corporate profits, making the euro-area securities less appealing for investors than the US assets. Since the beginning of the year, the [S&P 500][2] has been 15% up, while the [EuroStoxx 50][3] has been 5% down. How could the money be out-flowing from the US?

In fact, European stocks do not always fall when the euro rises. According to Goldman Sachs, the current situation resembles the events of 2012-2014, when assets were on the same road, also because of the expectations for the QE start by the ECB. The company believes that the economic recovery will be a stronger driver for corporations than exports. So, the euro strengthening won’t hit the corporate profits. Goldman Sachs suggests the corporate incomes will grow by 30% in 2021 and by 20% in 2022. The [EURUSD][1] should be at 1.25 next year.

Dynamics of the correlation between the [EURUSD][1] and [EuroStoxx

50][3]

Source : Bloomberg

A weaker US dollar improves international financial conditions, creating a tailwind for international trade and is more significant for European exports than a strengthening euro. Simultaneously, the ECB’s tight control over the euro-area bond market is another important driver for the European stocks’ growth.

If Christine Lagarde and her colleagues at the December 10 meeting expand the emergency asset purchase program by €500 billion, as Bloomberg experts expect, this will be enough to buy 70% of all bonds that the governments of the eurozone countries plan to issue in 2021, according to Pictet Wealth Management. The ECB already owns 43% of all German debt and every second out of five Italian securities. These figures have skyrocketed since the end of 2019, when they were 30% and 25%, respectively. As a result, quarterly yield spreads are the tightest since the previous global financial crisis.

Dynamics of quarterly yield ranges

Source : Bloomberg

Monthly [EURUSD][1] trading plan

The ECB controls the yields just like the Bank of Japan does, although it is not announced. The more monetary stimulus the ECB adds, the better the environment will be created for the European stocks and the euro. Even if the Governing Council reaches the 2% inflation target, which is unlikely, it will also be positive news for the euro. Whatever Christine Lagarde does, the [EURUSD][1] will be going up. The bulls could be discouraged by the correction of the US stock indexes or a no-deal Brexit. However, following the ECB meeting, it will be relevant to buy the pair on the price fall. The upside targets will be at 1.224 and 1.235.

Price chart of EURUSD in real time mode

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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