Euro crosses back above $ 1.20, a challenge for the ECB

Posted on Dec. 2020 at 12:48

The euro rose above the level of 1.20 dollars to settle on Wednesday at 1.2080 dollars, a gain of 7.6% since the beginning of the year. It rose 6.6% against the pound sterling and 3.2% against the yen. It is stable against the Swiss franc.

The renewed strength of the European currency contrasts with its slump at the start of the pandemic. At the time some strategists even predicted that the euro could plunge and reach parity with the dollar.

The verb is no longer enough

Its general increase (+ 6.1% of its exchange rate in 2020) is unwelcome for the European Central Bank (ECB) because it increases the risk of deflation. Exporters see their competitiveness degraded on foreign markets and in particular across the Atlantic. “If we except the first quarter of 2018, the euro is at its highest level against the dollar since December 2014. It was a month before the ECB announced its quantitative easing plan in early 2015” notes Robin Brooks, chief economist at the Institute of International Finance.

The euro’s rise challenges the ECB, which is due to announce support measures at its meeting on December 10. Without a strong announcement, the European currency could settle beyond its tolerance level of 1.20 dollars. It will take more than statements from the ECB and verbal interventions to push it back. In the summer and in September, they had saved a little time but without changing the psychology of the market.

Lower rates

“There is little the ECB can do to oppose a rise in the euro beyond 1.20. “ says George Saravelos, strategist at Deutsche Bank. This progression is facilitated by a general weakening of the dollar over which the ECB has no control. The strategist expects a level of 1.22 to 1.23 dollars at the end of the year unless the central bank sharply cuts its deposit rate in December. “A rate cut in December could bring the euro back below $ 1.17” says Jordan Rochester of Bank Nomura. In the medium term, the dynamics of financial flows (investments in European equities) should, among other factors, favor the euro and bring it towards 1.25 to 1.30 dollars.

$ 1.25 for Goldman Sachs

Before the ECB meeting next week, opinions remain clear-cut. Hedge funds bet modestly on the rise of the euro, while individual speculators anticipate the fall of the European currency against the dollar, according to the analysis of the Citi bank. For their part, individual clients of online brokers have been pessimistic about the euro since May. Hedge funds were neutral (spring, summer) then positive from September on the outlook for the European currency.

Next year, the consensus of economists and strategists established by the Bloomberg agency forecasts a euro between 1.20 and 1.23 dollars. Goldman Sachs bank expects the euro to rise against the greenback to $ 1.25 in 12 months and $ 1.28 in 2022. Societe Generale predicts that the European currency will rise to $ 1.23 next summer and 1 , $ 27 in 12 months.

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