The euro has continued to trade at stronger levels at the start of this week after staging a modest rebound at the end of last month which lifted EUR/USD to an intra-day high of 1.1909 on Friday. As economists at MUFG Bank note, the strength of the eurozone economic recovery surprises to the upside, which offers support to the common currency.
EUR/USD to stabilize around 1.20 heading into end-2021
“The main driver for the recent turnaround in fortunes for the pair has been the USD leg. Fed communication over the past week has set the scene for renewed USD depreciation as faith is restored in global growth and loose monetary policy. The scale of drop in US yields in July coupled with a continued dovish stance as signalled by Powell certainly puts the dollar back on a fragile footing.”
“The EUR has derived support at the end of last week from stronger than expected eurozone GDP and inflation data releases. Stronger growth in the eurozone is expected to continue in Q3 although there is lingering risk that the ongoing spread of the Delta variant could further delay the recovery. Growth forecasts for this year as a whole are expected to be raised closer to 5.0%.”
“Evidence of stronger economic recovery should encourage the ECB to discuss starting to phase out emergency support measures in the autumn. However, the ECB’s new dovish policy guidance has signalled strongly that they will maintain looser policy for longer. The net result is that the ECB’s dovish policy stance will dampen support for a stronger EUR from evidence of stronger growth and inflation in the eurozone.”
“We expect EUR/USD to stabilize around the 1.2000-level heading into year-end.”