What Next for EURUSD – 1.25 or 1.15?

on Dec 29, 2020
Updated: Dec 19, 2022

The EURUSD started the last trading week of the year with a bid tone. From the moment the markets opened on Monday, it wasted no time and started threatening 2020 highs. 

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This period of the year (between Christmas and New Year) is one of the trickiest periods of them all. With few banks open and very few institutional players active, the market may move on nothing at all. Once again, the U.S. stock futures pushed toward the highs at Monday’s opening, triggering a risk-on move as President Trump signed the COVID-19 release bill into law.

While the U.S. dollar is seemingly on its knees, the EURUSD pair reflects not only the dollar’s weakness but the Euro’s strength. Other Euro pairs outperform, too, so we may just say that the Euro is strengthening across the board.

What will 2021 bring first – 1.25 or 1.15?

1.25 Possible but the ECB Is Watching

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In August this year, the ECB intervened on concerns of a strong EURUSD exchange rate. From that moment on, the concern with the strength in the exchange rate made its way on every ECB statement and press conference. Yet, the rate pushed higher above the 1.20 level that granted the original verbal intervention. One may say, for a good reason.

There is little or no political risk seen in the Euro area in 2021. Moreover, a Brexit deal is in place, eliminating trade frictions between the European Union and the United Kingdom. Furthermore, the EU Recovery Fund reflects solidarity never before seen. Finally, the EU vaccination days reveal unity at the European level – countries acting and fighting as one against the pandemic.

Naturally, the currency should reflect all these macro-developments. If we add here the current account surplus, we should not be surprised to see 1.25 sooner rather than later.

The only problem with the factors mentioned so far is that they were the same when the EURUSD traded 1.15 earlier in the year, or even 1.18. Therefore, the big question remains – how much is too much for the EURUSD rise?

The rate reflects both the Euro’s strength and the U.S. dollar’s weakness. For it to reverse, either the U.S. dollar changes course, which means that the U.S. stock market is close to a top, or the Euro changes course for a reason independent of the U.S. dollar.

By the time markets open next Monday, 2021 will have already begun. Real flows will begin positioning for the year, and we will see the true nature behind the EURUSD’s recent strength.