EUR/USD 2021 outlook: Will the momentum continue?

on Dec 28, 2020
  • The EUR/USD has gained by more than 9% this year.
  • This increase has been because of the weaker dollar and actions by the ECB and European governments.
  • Will this trend continue in 2021 or is a reversal in play?

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The EUR/USD had a relatively strong year. After dropping to a multi-year low of 1.0640 in the first quarter of 2020, the pair bounced back by more than 14%. In total, it has risen by 9% this year, making it its best-year in more than a decade.


Why the EUR/USD rallied in 2020

There are several reasons that explain the surge of the EUR/USD pair in 2020. First, the pair rose because of the overall weaker US dollar. Indeed, the dollar index, which is an excellent gauge of the greenback, declined by more than 6% in 2020. 

It fell against all currencies that constitute the index. This decline happened mostly because of the risk-on sentiment in the market as investors priced-in a Covid vaccine. 

The pair also rose because of the actions by the European Central Bank (ECB) and the European Union governments. The ECB lowered interest rates and implemented quantitative easing policies to cushion the economy. In total, it unveiled a stimulus worth more than 1.8 trillion. 

European governments also unveiled a 750 billion euro recovery package. These funds will be distributed to European countries through grants and low-interest debt. Also, they successfully passed a 1.8 trillion euro seven-year budget.

The EURUSD also rose because the European Union, in general, responded to the coronavirus better than the United States.

EUR/USD 2021 outlook

The question among forex investors is whether the strength of the euro will continue in 2021. The pair will move depending on several key factors in the coming year.

First, in January, it will react to the US Georgia Senate election. If Republicans win one of the two seats, it will mean that Mitch McConnell will continue being the majority leader. As such, this will lead to a significant gridlock in Washington and make it difficult for Joe Biden to achieve his agenda. 

If Democrats win, it could lead to more stimulus, which will also be bullish for the euro in the near term.

Second, the EUR/USD will react to the actions of the ECB. In the past interest rate decisions, the ECB has lamented about the strength of the euro. But it still lacks ammunition to devalue the currency. 

Finally, the pair will also move depending on the market sentiment. If the risk-on sentiment remains, it will continue rising. However, there’s also a possibility that investors will start worrying about risks like the ballooning global debt.

EUR/USD technical outlook

EUR/USD technical outlook

Looking at the weekly chart, we see that the EUR/USD pair has been in a strong upward trend and is 3% below the highest point in 2018. The pair is significantly above the 100-day exponential moving averages. At the same time, oscillators like the Relative Strength Index (RSI) and Stochastic are getting overbought. Therefore, the pair will possibly continue rising as bulls aim for the 2018 high at 1.2562 and then pull back as most oscillators get overbought.