EUR/USD could drop by 5% to 1.6 in 2021 – Danske Bank
- The EUR/USD could pare back last year's gains and drop to 1.16 according to analysts at Danske Bank.
- They believe that the inflation will rise to 2% while the unemployment rate will fall below 4%.
- Analysts at JP Morgan and Deutsche Bank have also turned bullish on the dollar.
The EUR/USD has fallen by more than 0.30% as analysts start changing their minds about the US dollar. It is trading at 1.2175, which is a few pips above this week’s low of 1.2138.
Analysts bullish on the dollar
In a research note published this week, analysts at Danske Bank predicted that the EUR/USD will have a rough year. In their three-month forecast, they estimated that the pair will drop to 1.2200. However, in their 12-month prediction, they said that the pair could drop to 1.16, which is about 5% below the current price.
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They argued that a stronger recovery of the American economy will put the Fed under pressure to hike interest rates. For one, they believe that the annual inflation will rise above 2% this year while the unemployment rate will drop to below 4%.
They are not alone. In a statement today, George Saravelos, an analyst at Deutsche Bank said that he had turned bullish on the dollar. The same is true with analysts at William Baer and JP Morgan. Some analysts from other forex brokers have also changed tune about the dollar.
The analysts believe that the recent victories by Democrats in Congress will be bullish for the US dollar. That’s because they will prioritise more government spending, which will in turn push the Fed to increase rates.
Indeed, some Fed officials have already started talking about rate hikes and quantitative easing tapering. In a statement yesterday, Raphael Bostic of Atlanta Fed said that the bank will possibly hike in 2022. Similarly, Robert Kaplan has signaled that the bank will start tapering its asset purchases this year.
Meanwhile, the EUR/USD is reacting to a statement by Christine Lagarde, the ECB President. Speaking in a virtual conference today, she said that she stood by the previous estimates about EU recovery. This means that the bank will probably not change its existing policies even as the number of coronavirus cases continues rising.
EUR/USD technical outlook
After rising in early trading, the EUR/USD pair pared back some of those gains after the Lagarde speech. It is trading at 1.2175, which is below the intraday high of 1.2222.
On the hourly chart, the price is below the rising trendline that is shown in black. It has also moved below the 25-period and 15-period moving averages. The Relative Strength Index (RSI) has moved from the overbought level of 70 to the current 40. Therefore, the pair will likely continue falling today as bears target yesterday’s low at 1.2140.