EUR/USD Rate Outlook Hinges on 2021 should provide traders with greater clarity on the direction of the exchange rate. The major economic indicators have all provided EUR/USD prospects over the past year or so, but more importantly, investors have become increasingly confused by the differing official rates and warnings from central banks. As a result, traders have become pessimistic about the possibility of trading back above the 50-day moving average. Nevertheless, there are key indicators that can help us determine whether we are seeing a sideways move or an explosive move upward.
In order to determine if the EUR/USD is experiencing an explosive breakout, we must analyze the EUR/USD rate outlook during the period just before the release of the EU guidelines for its refinancing plan. During this time frame, both traders and institutions were awaiting the publication of the European Central Bank (ECB) draft report on its plan to introduce the euro as a legal tender in the Irish and UK markets. This marked the beginning of the week of April and signaled the start of a large move in both markets towards breakouts. The purpose of this chart is to illustrate the changes in market expectations leading up to the release of the EU refinancing plan.
As the market began to develop rapidly over the opening two days, it became clear that the ECB was planning to reverse the previous policy of keeping the interest rates of the Eurozone at a higher level for longer than normal. The ECB released the guidelines for its refinancing plan on the same day. The indications were that this would cause a large and sudden upward trend in the exchange rate. Based on the EUR/USD rate outlook, we can identify that the upward trend will continue until the end of the ECB’s program.
EUR/USD rate outlook indicates that an uptrend will begin in the United States and will continue until the end of the ECB program in May. This will result in a stronger EUR/USD pair in the European markets. The upside potential of the EUR/USD rate outlook will be more or less balanced depending on the actual market direction. On the contrary, a negative upward trend established in the United States will result in a weaker EUR/USD pair in the European markets and a possible continuation of the upward trend in the United States.
In addition to these considerations, there are some additional issues that should be taken into account. First, the strength of the euro could weaken the effect of the upward trend. The euro will no doubt be affected by any political developments in Europe, but the effects will probably be transitory. If the European political situation will remain calm, the impact of the weak euro may remain limited. But even if this happens, traders will still have to consider the effects of the upward trend on the exchange rate gap. For this reason, it is important to evaluate the complete scenario of the market before making decisions about the direction of the exchange rate.
Second, the Eurozone as a whole is facing deflation. Inflation will continue to press the upward trend in the United States until the effects of the deflation are experienced in the Eurozone. As in the United States, the effects of deflation are likely to reduce the exchange rate gap between the United States and the Eurozone. If the downward trend continues, the EUR/USD rate outlook will indicate that the Eurozone economy will experience greater monetary policy flexibility.
Third, the EUR/USD rate outlook may have already reached its negative peak. As in the United States, there are various factors that can contribute to this process. In the United States, these include the Great Recession, rising oil prices, weak consumer spending in the United States, the housing bubble bust, the wars in Iraq and Afghanistan, unfavorable global economic indicators, and other factors. The European Central Bank (ECB) and its balance sheet continue to face pressure from within the European Union (EU). The EU is concerned that its own economic growth rate is too low and that this gap can widen to the point that it will lead to increased government deficits and higher interest rates.
These three factors (a lack of global growth, a declining unemployment rate, and an increase in budget deficits) seem to be in place, but no one is certain what the long-term implications of this trend will be. In addition, there is a danger that the upward trend will reverse. This would result in an increase in the Eurozone’s interest rates and a reduction of the Eurozone’s currency values. The upside potential is therefore limited. However, if investors begin to see signs of a reversal, they may begin to sell the EURUSD as a short-term fix to the problems of the EU. If this occurs, the EURUSD could quickly become over-valued and trade against the USD.