EUR/USD Price Forecast for 2021: Decisive Time for EUR/USD Buyers
Skerdian Meta • 9 min read
The EUR/USD has always been very trendy; it declines for several years, then turns bullish and increases for nearly a decade, only to turn lower again for the years to come. But, since 2017, the trend might have changed for this pair. The Euro was on a bearish trend against the US Dollar from 2008, after the global financial crisis, and it was headed for parity at 1:1 which was also predicted by many analysts. But it didn’t happen, and in fact, the trend might have turned bullish since 2017.
In March 2020, the EUR/USD tried the downside as the coronavirus found its way to Europe, but it reversed higher this time, which was a signal about the long term trend reversal. Another strong signal has been the bullish momentum since then. The EUR/USD has been rallying, leading the forex market against the USD at times, breaking above the 100 SMA at 1.20 on the monthly chart, which ended the bullish retrace in 2018. Now this pair faces another major resistance zone, stretching from 1.2350 to 1.2380; if it breaks above, the retrace will turn into a bullish trend on this time-frame, if not it will just be another retrace before the long-term bullish trend resumes again.
Recent Changes in the EUR/USD Price
|Period||Change ($)||Change %|
The EUR/USD is heavily affected by fundamentals, since these two currencies represent two of the three major economic zones in the world, although it seems like fundamentals are contradictory for now. The economic side is clearly in favour of the USD, since the US economy has been keeping up a good recovery pace after the COVID-19 crash, while Europe is close to another recession, but politics don’t favour the USD. That has been one of the main reasons for the bullish run in the EUR/USD, which has taken this pair above 1.20 and into the resistance zone above 1.2350.
The Brexit trade deal, which was reached at the last minute in December last year, is another positive factor for the Euro. Although now, this pair faces two major obstacles/events at the beginning of 2021: first the resistance zone at 1.2350-80 and second, the future of US politics, which will also decide the economic path of the country for the next four years. Both sides are vulnerable at the moment, and as the world finds its way out of the coronavirus crisis towards spring, the rebound in Europe if there is one, will help the Euro as well.
EUR/USD – Forecast Summary
|EUR/USD Forecast: H1 2021|
Price: $1.16 – $1,17
Price drivers: US politics, Technical reversal, Coronavirus, Global economy
|EUR/USD Forecast: 1 Year|
Price: $1,350 – $1,400
Price drivers: Economic recovery, Post COVID-19, ECB-Christine Lagarde, Less dovish central banks
|EUR/USD Forecast: 3 Years|
Price drivers: Tighter monetary policies, FED-Jerome Powell, Global Politics
The EUR/USD Price Prediction for the Next 5 Years
As we mentioned above, the EUR/USD was on a bearish trend from 2008, but the coronavirus situation has been positive for the EUR/USD, which has come largely because of the decline in the USD. In our last forecast, we suggested that the decline in the US Dollar was coming to an end for the reasons mentioned above. The 1.20 resistance zone was also a major area to overcome, according to technical analysis.
But, the decline in the USD continued, despite the strong economic recovery, and the EUR/USD closed 2020 with a strong bullish momentum. Fundamentals are not looking good for the Euro, so if the decline in the USD ends any time soon, the trend will change immediately. The coronavirus situation is also a major factor, since Europe is imposing heavy restrictions, which are hurting the economy enormously, so there are quite a few factors in play at the start of the new year, which will probably clear as the weeks go by.
EUR/USD Making the Most of Covid-19?
The Euro has reacted quite strangely since the start of the coronavirus pandemic. The EUR/USD surged higher at the end of February, when the virus made its way to Europe, increasing from 1.08 to 1.15 when the other currencies were crashing against the USD. But, it also turned bearish in the first two weeks of March, falling to 1.0630s. By May, it started reversing higher, as the USD turned bearish, and it hasn’t looked back since then. There are two sides to this strong bullish run since March 2020 – the USD, which has been battered during this time and the Euro, which has benefited from all this, leading the way up for most major currencies.
The coronavirus situation doesn’t seem too bad in the US, and the restrictions are not too harsh, apart from the states of New York and California, while in Europe the restrictions are harsher, with the new UK strain of the virus. But, the USD has been declining nonetheless. The Euro, on the other hand, has been leading the currencies higher, despite the Eurozone having the strongest restrictions in place. One of the major levels at 1.20 has gone, which opened the door for 1.2550 and maybe higher, if the sentiment in forex remains the same, and this sort of price action continues. Buyers gained even more confidence after the break of 1.20, and they appeared to be totally in charge in the first week of 2021. So, this entire coronavirus situation has been positive for the EUR/USD.
US Fundamentals Look Much Stronger Than Eurozone Fundamentals
The fundamental picture is similar to the coronavirus situation which we analyzed above; they are clearly in favour of the USD, since the US economy is doing much better than the economy of the Eurozone, yet the USD is declining while the Euro is rallying. Let’s take a look at the fundamentals for both economies.
Eurozone December 2020 Manufacturing Report
|Spanish Manufacturing PMI||49.8||50.8||52.5|
|Italian Manufacturing PMI||51.5||52||53.8|
|French Manufacturing PMI||49.6||49.1||49.1|
|German Manufacturing PMI||57.8||57.9||57.9|
|EU Final Manufacturing PMI||53.8||53.6||53.6|
As shown in the tables above, the manufacturing sector is not in good shape in the Eurozone, apart from Germany, which is actually pulling up the entire Eurozone manufacturing. However, it only affected the survey, since the manufacturing PMI indicator is quite low in Italy, France and Spain, and not far from contraction. So manufacturing, which is the strongest sector during these times of crisis, since services have been decimated due to the lockdowns and all the other restrictions, is not moving too far away from contraction.
US ISM Manufacturing December
|ISM Manufacturing PMI||60.7||56.6||57.5|
|ISM Manufacturing Prices||77.6||66||65|
|Final Manufacturing PMI||57.1||56.3||56.5|
US manufacturing, on the other hand, is surging higher. The final manufacturing PMI report for December, which was released at the beginning of January, was revised higher to 57.1 points from 56.3, which was already a very decent level. The ISM manufacturing report is showing an even better situation in this sector, climbing above 60 points and heading for another record high, if the manufacturing activity continues the pace of expansion.
Eurozone November 2020 Services Report
|Spanish Services PMI||39.5||36.5||41.4|
|Italian Services PMI||39.4||40.9||46.7|
|French Final Services PMI||38.8||49.1||38|
|German Final Services PMI||46||46.2||46.2|
|EU Final Services PMI||41.7||41.3||41.3|
The service sector has been terribly hit by the coronavirus restrictions, and especially the lockdowns, which are detrimental for this sector, since it relies on physical contact between people. As a result, with the social distancing, this sector suffers terribly. Services fell to record lows all over the world during the spring 2020 lockdowns, and even more so in Europe. This sector rebounded after the reopening in summer, but it didn’t last long, and it fell into recession again in September, as the restrictions restarted.
The decline got even worse after restrictions increased in October and November, as the report above shows. In December 2020, we saw an improvement in German and French services in the initial reading in the middle of that month, but as the restrictions increased with the holidays towards the end of the month, the service sector should weaken again and it should continue that way with restrictions remaining in place in January. US services, on the other hand, are holding at above 55 points as of December 2020, having jumped to 58.4 points in November.
Eurozone November 2020 CPI Inflation Report
|Core CPI Flash Estimate YoY||-0.30%||-0.20%||-0.30%|
|Core CPI Flash Estimate YoY||0.20%||0.20%||0.20%|
US November 2020 CPI Inflation Report
|Core CPI YoY||1.60%||1.50%||1.40%|
|Core CPI MoM||0.20%||0.10%||0.00%|
Inflation has also diverged in favour of the USD, but the US dollar hasn’t benefited from it so far. In Europe, inflation weakened during the first few months of last year, as crude oil prices headed lower, with US WTI Crude falling to $ -37.50. But they didn’t turn negative, as they have done since August. The annualized CPI (consumer price index) has remained stable at -0.3% for a few months, while the core CPI, which measures the change in the price of goods and services purchased by consumers, excluding food, energy, alcohol and tobacco, remains at -0.2%.
US inflation, on the other hand, is holding up well and slowly picking up speed instead, as core CPI increases to 1.6%, while the headline CPI inflation increased to 1.2% on an annualized basis. The ISM manufacturing prices also showed a massive increase to 77.6 points for December, as the ISM report released in January showed.
Looking at the Euro index EXY chart as far back as it shows in around 2007, it seems pretty similar to the EUR/USD chart, which is also partly because the USD accounts for a large portion of the weight in the basket of currencies against which the Euro is weighed. During the 2000s, the EXY index was on a bullish trend, as was EUR/USD. But it reversed during the 2008 financial crisis, to just above 160 points. The EXY has been very volatile, making some major declines, followed by swift reversals higher. In 2014 we saw a crash lower, after the previous ECB president, Mario Draghi, said that they would do whatever it takes to help the Eurozone economy. This index fell below the moving averages and has remained below them since then. The 100 SMA in particular has turned into the ultimate support for the EXY on the monthly time-frame chart. This moving average provided resistance early in 2018, after the pullback from the lows, and it seems like it is also providing resistance right now – we will expand on this in the technical section below. The DXY index on the other hand, despite being negatively correlated, is not as spot on with the EUR/USD as the EXY. The 100 SMA is not providing support for the DXY, but the price reversed way above it in 2018. So, the USD index is not as closely correlated to the EUR/USD as the Euro index, but it is worth watching it when trading the EUR/USD in the long term.
Technical Analysis – Is the 200 SMA Going to Hold or is it Going to Break?
After the bullish run from 2000 until 2008, the EUR/USD turned bearish and remained bearish until 2017, or perhaps until March 2020, if you consider that as the real reversal. Although, it is not clear yet whether the bullish reversal has happened or if this is just another retrace before the long-term decline resumes again, as mentioned above. Moving averages haven’t been the most reliable indicators on the monthly chart, although they have done a good job at times. The 100 SMA (green) provided solid resistance during the retrace higher in 2018, reversing the price down, while the 200 SMA (purple) worked as some sort of support in the 1990s. The price broke above the 100 monthly SMA in November and above the big round resistance at 1.20, but now buyers are facing the 200 SMA at 1.2350s and the previous support around the same area.
Stochastic has reached overbought levels on the monthly chart
On the weekly chart, moving averages have been doing a good job as support and resistance since 2015. That year, we saw a major decline in this pair, which took the price from around 1.40 to 1.0440s, stretching into Q1 of 2021 as well. The 20 SMA (gray) couldn’t even catch up with the price back then, but the 50 SMA (yellow) turned, eventually catching up and turning into resistance that year. The 100 SMA caught up later and turned into resistance in 2016, pushing the price lower. The EUR/USD made new lows, falling to 1.0340s. But then we saw a bullish reversal after Donald Trump, who advocated for a softer dollar and lower interest rates from the FED, came to power. The EUR/USD increased to 1.2550s, but then started to decline after the beginning of the trade war between the US and China. The 200 SMA turned into support for this pair for almost two years, but it was eventually broken, as the USD kept marching higher, bottoming out in March 2020, after the breakout of the coronavirus in Europe. Since then, we have witnessed a strong bullish momentum in the EUR/USD, as the dollar kept declining, which saw the pair breaking above 1.20, after failing in the first attempt. The 20 SMA turned into support after the rejection at 1.20 and forced this pair to resume the bullish trend, breaking above 1.20. It managed to hold the next resistance level at 1.2330s, but the price is not declining, so we might see a breakout at this level.
On the daily chart, we see that moving averages were acting as resistance during 2019, until March 2020, as the price was moving lower on a steady downtrend. But in March, the price reversed higher, breaking above the moving averages by May, and eventually those moving averages turned into support for the EUR/USD. When the trend picked up pace, the smaller moving averages provided support, while when the trend slowed, the larger period MAs came into play. Since the bounce off the 100 SMA (green) at the end of October, the trend has picked up speed again, and the 20 SMA (gray) has been providing support, pushing the price higher, which leaves this pair in a strong bullish position at the start of 2021.