FX.co ★ EUR/USD: will the euro take its revenge?

The coming week may turn out to be very favorable for the European currency. Experts do not exclude that the euro is able to take revenge in the EUR/USD pair, beating the dollar and winning back previous losses.

According to some analysts, changes are coming in global currency markets in the third quarter of 2020. They will be most likely associated with other topics, in addition to sharp changes in risk sentiment in response to an infusion of liquidity from global regulators. Among such topics, the question of the possible dominance of the euro raises, which seeks to take the reins of government after the total weakening of the dollar across the entire spectrum of the market.

The key event that can affect the dynamics of the European currency will be the results of the EU summit, which will be held this week (July 17-18). One of the important issues remains the way of financing the Eurozone countries, which have experienced the negative results of the COVID-19 pandemic more than others. The market is interested in the form in which Brussels will provide assistance - through grants or loans. The fate of the economy of the Euroblock and the single currency depends on this. Any positive comments regarding the possible approval of the European Commission plan will provide substantial support to the Eurocurrency.

The positive measures taken in this direction are facilitated by a change in rhetoric by Angela Merkel, German Chancellor. For the German leader, this was a difficult step, but she agreed to increase the funds intended for European spending. According to experts, the current EU budget measures in response to the crisis caused by the COVID-19 pandemic will not be a cure for negative consequences, but will help countries in need and strengthen internal ties.

The advantage of the European economy over the American one is the active increase in the pace of recovery. At the same time, European countries are ahead of the United States in a number of indicators, primarily in relation to the number of cases of COVID-19. It can be recalled that there is still a high increase in patients and deaths from coronavirus in the United States, and in Europe, the situation is much better.

Another factor contributing to the recovery of the eurozone economy and giving odds to the dollar is the possible weakening of the ECB's monetary policy. According to analysts, we should not expect a noticeable increase in the Fed's balance sheet in the near future, while the ECB is ready to expand the quantitative easing program (QE) by € 400– € 600 billion by the end of December 2020.

Comments from Luis de Guindos, ECB Vice President, is a significant support for the single currency. He noted the positive prospects for the European economy, which have improved significantly since the start of the pandemic. Along with analysts, the ECB vice president estimates the high potential for economic recovery in the Eurobloc in the third and fourth quarters of 2020, which is good news for the euro. The current situation increases the chances of the European currency for further growth.

According to the estimates of currency strategists at Societe Generale, the euro can significantly strengthen against the dollar during the current year and the first half of the next. The Euro will get a head start before the US dollar by narrowing the economic gap between the US and the eurozone. This is due to a critical increase in the number of COVID-19 cases, which is why the US economy may weaken more than the market expects.

The current situation negatively affects the dynamics of the EUR/USD pair, although it remains favorable for the euro. According to experts, the classic pair has more chances to rise above 1.1500 than to decline below the level of 1.1200. This remark is true: the EUR/USD pair is now actively breaking up, and these attempts are mostly successful. At the end of last week, it rose by 0.1%, to 1.1294. And on Monday morning, July 13, the EUR/USD pair started on a positive note, reaching 1.1326–1.1327. Later, the pair went beyond this range.

Some currency strategists do not advise to completely get rid of the USD as a safe haven amid a surge in the number of cases in the United States. At the same time, analysts emphasize that the medium-term and long-term prospects of the US currency look "bearish". They believe that the EUR/USD pair slipping to the bottom of a wide range of 1.1100–1.1400 can be used to form long positions.

According to analysts, the single currency will make every effort to make a decisive price leap. If successful, the euro will be able to get ahead of the dollar and make up for lost time. However, the question of further leadership of the Euro remains open.