EUR/USD: Analysts predict a stronger euro after benign ECB decision

The EUR/USD is in its third consecutive day in the green as investors continue to digest the ECB interest rate decision. The pair is trading at 1.1850, which is higher than this week’s low of 1.1750.

ECB helps support the euro

The European Central Bank (ECB) did what most analysts were expecting yesterday. It left interest rate and the pandemic emergency purchase program unchanged. It also announced its willingness to continue supporting the European economy during the crisis.

In her press conference, Christine Lagarde talked about the recent strength of the European economy. Furthermore, data suggests that the economy will rebound in the third quarter. Furthermore, the unemployment rate has started to fall, retail sales have rebounded, and the manufacturing and services sectors are booming.

In the conference, she also said that the bank was watching the strength of the euro. But she did not reiterate whether the bank is considering any measures to devalue the currency. For starters, a stronger euro tends to hurt European companies who make most of their money by exporting. Therefore, traders interpreted this to mean that the euro strength will continue.

Indeed, the euro has gained more than 6% against the dollar in the past six months. And the euro index has gained more than 4% in this period. In a statement, analysts at ING Bank said that Lagarde’s statement presented no hurdle to renewed euro strength. They now expect the EUR/USD pair will rise to 1.2500 in the next few months. They said:

“Given the outlook, it is hard for ECB to lean against currency strength and with bearish USD dynamics firmly in place, the medium-term upbeat EUR/USD outlook for 2021 remains intact.”

The same sentiment was repeated by other analysts. Those at Danske Bank said:

“We continue to see a global recovery, activity at a pre-COVID level by mid-2021, a Brexit resolution and fairly benign global political situation (e.g. trade). Thus, risks appear tilted to the upside in EUR/USD and next week’s Fed meeting will likely provide a test of 1.20 in spot.”

Earlier today, the EUR/USD reacted mildly to the benign inflation data from Germany and Spain. According to Destatis, German’s headline CPI rose from -0.1% in July to 0.0% in August. In the same period, wholesale prices rose from -2.6% to -2.2%. In Spain, the headline CPI rose from -0.6% to -0.5%.

EUR/USD technical outlook

The daily chart shows that the EUR/USD has risen above the support level shown in black. It also shows that the pair is above the short and medium-term moving averages. Most importantly, the pair has formed what seems to be a bullish flag pattern. That means that the pair is likely to continue rising as bulls targets moves above the YTD high of 1.2000.