During the dollar battles, especially noticeable in the EUR/USD pair, the European currency was most often in the background. But now, the euro is trying to be in the spotlight of the markets, increasing its potential.
In the middle of this week, a significant decline in risk sentiment was recorded in the market, along with a confident rally in US government bonds. The combination of these factors supported the demand for the dollar, especially in the EUR/USD pair. However, the short-term positive did not prevent the further decline of the USD, experts emphasize. According to analysts, the strength of the dollar, that was clearly manifested in the first quarter of 2021, has failed. The US currency reacts weakly to positive statistics from the US, since most of the good news is already taken into account in the USD quotes.
On Wednesday, April 21, the market saw a rebound in the dollar against other currencies in view of the statements by the Central Bank of Canada about raising interest rates in 2022. At the same time, the regulator reduced the volume of the asset purchase program, sharply improved the forecast for the country's economy, and kept the key rate at the same level. Many analysts believe that the Bank of Canada's turn to tighten monetary policy will be a harbinger of changes from other central banks.
During the current month, the US currency continues to fall in price, while trying to maintain its gained positions. The main reason for the fall in the USD, economists believe, is the decrease in the yield of US government bonds in the United States and the market's confidence in the speedy recovery of the global economy. Earlier, the dollar rebounded from a seven-week low reached against the world's leading currencies. The rise occurred on the wave of demand for the US currency as a safe-haven asset.
On the morning of Thursday, April 22, the dollar exchange rate was again set to decline. Pressure on the American currency was exerted by the fall in US government bond yields and the upcoming ECB meeting. The competitor of the dollar, namely the European currency, experienced a small corrective decline after the rise recorded during two trading sessions. On the morning of Thursday, April 22, the EUR/USD pair was trading near 1.2044-1.2045, leaving no attempts to rise higher.
Despite some contradictions in the technical indicators, experts expect EUR quotes to grow. At the moment, the dynamics of the European currency has moved away from the moving averages with periods of 34, 55, 89, and 144, which are directed upwards. The current indicators show a bullish mood, which will continue in the medium term. Potential bull targets are at 1.2068, 1.2113, and 1.2167. The cancellation of the bullish scenario is possible in the event of a breakdown of the mirror level of 1.2035, which will open the way to 1.2005, 1.1985, and below. Analysts believe that a sharp decline in the EUR/USD pair is unlikely, but suggest keeping a close eye on the 1.1925–1.1950 area.
An important event for the currency markets will be the next meeting of the ECB, which is scheduled for Thursday, April 22. According to experts, the regulator will leave the key rate at a record low near zero. Market participants expect signals from the ECB about further support measures and economic recovery. Among such ways of support, experts include a slowdown in the pace of QE purchases in the third quarter of 2021. According to economists, this will cause an increase in the yields of European bonds and the single currency, along with an improvement in the economic outlook. In general, the market expects the regulator to be clear about the plans for buying QE and a balanced assessment of the state of the euro zone economy.
Near-term prospects for EUR:
Most analysts are optimistic about the short and medium term prospects for the single currency. Many view the euro's prospects as much higher than the dollar's. According to currency strategists at ING Bank, the euro may soar above 1.2500 this summer. The reason for this is the strong economic growth in the eurozone, which is already following closely to the US economy. At the same time, the soft policy of the Federal Reserve is doing a disservice to the dollar, weakening it, according to ING. Analysts at TD Securities, who are also supporters of the strengthening of the euro, agree with this. However, the bank believes that this growth will be insignificant. The implementation of such a scenario is possible if the ECB gives an optimistic assessment of the economic prospects of the eurozone, TD Securities emphasizes.
MUFG economists also remain positive about the outlook for the European currency. The bank expects that in May of this year, the EUR/USD pair will reach 1.2350. Experts believe that the tandem has all the opportunities for an upward movement in the next month. According to analysts, the mirror level of 1.2035 is now a strong support level for the euro.
Experts agree that the future dynamics of the euro will depend on the current strategy of the ECB. The regulator's speech, scheduled for Thursday, April 22, will determine the direction of the single currency. Experts and market participants expect the ECB to improve its short and medium term economic forecasts amid the acceleration of vaccination against COVID-19, believing that this will add to the optimism of the single currency.
