Based on the knowledge that investors have at a given moment, they always make prices with a certain expectation about the future. For example, currency rates are the macroeconomic prospects of a country or region, and the price paid for shares usually implies an expectation about future earnings and sales development.
Professional market parties closely follow the financial news and continuously process new information, including economic forecasts and other expectations. Based on this, the market arrives at an average expectation for a share or currency pair’s price development. In our case – the dollar versus euro.
Specifically, they are subject to (measurable) underlying interest rate differences, inflation, unemployment figures, trade, and capital flow for exchange rates. Simultaneously, a large part of the pricing is also related to ‘event’ risks that cannot be gauged in advance and changing market sentiment. Let’s go more in-depth in this Euro to Dollar forecast.
History of the EUR/USD Pair
The Euro (EUR) is a fairly young currency that was born in 1999. The single European currency has replaced a whole galaxy of the EU countries’ national currencies: The Deutsche mark, the French franc, the Italian lira, and others. Therefore, one of the euro’s features is its susceptibility to macroeconomic statistics of the entire Eurozone and individual EU countries’ indicators.
The European currency was officially introduced into non-cash circulation on January 1, 1999, and on January 1, 2002, banknotes and coins were introduced into cash circulation. In terms of the volume of use in international payments, the euro is second only to the US dollar. It is also the second most popular (after USD) reserve world currency. At the time of the official start of trading, the EUR/USD rate was in the 1.1800 area.
Since the beginning of trading in 1999, the EUR/USD pair has undergone significant changes. In the first two years, the euro’s prospects were still vague, and the quotation was declining, reaching a minimum of around 0.8200. The pair then rallied for seven years, reaching an all-time high of 1.6000 in 2008. In subsequent years, due to the banking crisis’s influence and various problems in the Eurozone, the pair corrected significantly.
To check how has the rate of EUR/USD changed over time and EUR/USD current price, please follow this link to the extended historical price chart.
In terms of market sentiment, 2020 has been a very illustrative year. During the first coronavirus wave in March, the market was unpleasantly surprised by the severity, magnitude, and impact of the coronavirus pandemic, causing investors to flee to the dollar as a safe haven.
Initially, the coronavirus was thought to be “a Chinese problem only.” Still, as the virus began to spread faster worldwide – locking up economies around the world – the dollar exchange rate was recalibrated in no time.
A similar revision took place three months ago but in the opposite direction. When pharmaceutical company Pfizer released positive vaccine news in early November, the dollar fell in value due to the disappearance of the need for a safe haven.
In both cases, the market reaction was apparent, but that is not always the case. Take the announced financial support packages from the European Central Bank (ECB) this year. Whereas in the past, the availability of more euros often caused downward pressure on the euro, such packages resulted in an upward price movement this year.
Coronavirus support was “suddenly” perceived as positive by the market. According to investors, the ECB showed it was doing everything it could to prevent companies from collapsing and safeguard employees’ jobs.
Precisely because of the occurrence of unforeseen market conditions and the sometimes-surprising market reaction to them, our starting point is that you should always take price estimates with a grain.
For example, at the end of 2018, many market parties anticipated a weaker dollar, but in 2019 the dollar picked up with the US-Chinese trade war as a catalyst. That created a lot of uncertainty, causing capital to flow to safe havens like the dollar. Such events are difficult to envision, and this was especially true in recent years with a fickle character like Donald Trump at the helm in the United States.
EUR/USD Current Rate
The current rate of the EUR/USD pair is $1.14204. Below, you can see an interactive chart from Forex in real-time:
Characteristic Features of the EUR/USD Pair
The EUR/USD pair belongs to the major currency pairs (majors) and is characterized by increased liquidity. This is not surprising, as it includes two of the world’s major reserve currencies: USD and EUR. It is in the euro/dollar that the largest volume of transactions is made during daily trading on the Forex market (approximately 20% of the total volume).
The behavior of the EUR/USD pair is a kind of indicator showing the comparative state of the US and EU economies. If the US economy is growing steadily, and problems arise in the EU, EUR, this might cause a EURO to US dollar fall. Conversely, if there is a decline in growth rates in the US and the Eurozone demonstrates good performance, the EUR/USD pair will grow. Let’s consider the main trading characteristics of this pair:
- Active trading hours – the pair is traded around the clock except for weekends. It is most active during the European and American trading sessions. It is at this time that the largest trading volumes take place, and the main movements of the EUR/USD pair take place.
- Volatility – the EUR/USD pair is characterized by medium volatility. During the release of important data, the pair is capable of making strong movements from 100 points and above. But in general, if you look at the historical data, the average daily volatility of the EUR/USD pair is about 80 pips.
- Spread is one of the main advantages of this pair. Due to the highest liquidity, the spread for the EUR/USD pair is minimal. On popular ECN accounts, the spread is usually less than 1 pip.
The Dollar in 2021: More Predictable?
Perhaps the direction of the dollar will become a little easier to predict under President Biden. First of all, financial markets are counting on the new US president to run less internationally and deal more diplomatically with trade disputes. This provides more peace and security in the financial markets, reducing the need for a haven such as the dollar.
Also, Biden is expected to spend (a lot) of money to continue to stimulate the US economy, including post-corona, which will further increase the US’s debt position. The fact that interest rates will remain low for a longer period also plays a role: at the most recent meeting of the Federal Reserve, Chairman Jerome Powell hinted that he would not have an interest rate hike until mid-2023.
All of this leads to an estimate that capital flows towards emerging markets and currencies will continue to flow at the US dollar expense. Countries such as Indonesia and Mexico have aggressively lowered their interest rates, but interest rates in these countries are still considerably higher than in the United States.
Besides, countries such as China, South Korea, and Taiwan have had the coronavirus outbreak reasonably under control for some time now. In combination with optimism about the arrival of COVID vaccines, this means that investors are, in any case, moving to more risky markets.
EURUSD Technical Analysis
To determine global trends and key levels, we’ll do a technical analysis of the biggest time frame for the EURUSD.
We saw a stable bearish trend on the EUR to USD monthly price chart for over ten years. Then, the pair has been consolidating in the form of a triangle since the beginning of 2017.
The EURUSD‘s expected trading range will be located within the triangle marked with purple lines in the coming years. So, our further forecast will be based on the assumption that the price won’t break the pattern’s upper and lower limits in the medium term.
If it does, we’ll have a clear signal of the beginning of a trend movement. The lower limit’s breakout will continue the bearish trend while the upper limit’s one will point to the euro’s significant bullish potential.
EURUSD price prediction for next three months
To predict the price movement in the next three months, we’ll conduct a technical analysis of the EURUSD’s weekly chart.