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Limited Upside Potential for EURUSD

October 5, 2020 By Mircea Vasiu

The EURUSD remains bid on every single market pullback. Ever since the ECB intervened verbally and talked the EURUSD down, the pair did not come closer to the 1.20 again. 

An interesting perspective on the EURUSD pair is that if we use the 10-year average deviation and the USD real effective FX rate, the EURUSD long-term equilibrium value points to 1.30. This comes in line with the IMF’s view that the common currency is too weak when compared to the current account surplus posted in the area.

However, all those calculations were made considering normal economic circumstances. But in the meantime, 2020 showed us that an exogenous factor like the COVID-19 virus can change things in a blink of an eye.

Can the Euro Still Move Higher in 2020?

The EURUSD exchange rate is the most-watched rate part of the FX dashboard. Also, this is the main currency pair traded by retail accounts due to reduced spreads and relatively high volatility. Many traders attribute to the EURUSD the volatility in financial markets – the saying goes that if the EURUSD does not move, nothing moves.

To this extent, 2020 was quite a year. The pair rose from 1.07 area to 1.20 in less than three months. Moreover, it did so during the most illiquid months of the year – during the summer months.

Moving forward towards the end of the trading year, October is unlikely to bring anything new on the EURUSD front. The ECB will likely wait until December before expanding the QE program while the Fed waits for the U.S. elections outcome. Therefore, until November, the EURUSD pair will likely trade between 1.16-1.18, driven higher or lower by fiscal stimulus talks in America.

The USD’s role as a safe-haven currency also plays an important role in the EURUSD pair. If the markets, and in particular the equity markets, begin a risk-off move, the USD is likely to gain across the board. Therefore, the EURUSD will have a hard time advancing in a risk-off environment.

Many research houses look beyond 2020, and the consensus builds on a much higher EURUSD. Some view 1.25 or even 1.30 as possible for the next 12-15 months, mostly driven by a weak USD rather than a strong Euro.

Regardless of the future potential, the short-term expectations are that the EURUSD will consolidate into the U.S. elections and the ECB easing decision. What happens after that is the real prize for long-term EURUSD traders!

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