FX.co ★ EUR/USD in no hurry to correct despite high uncertainty

Over the past several weeks, the main trend in the foreign exchange market has been a massive sell-off of the greenback. This enabled its main competitors, including the euro, to reach multi-year highs. However, the trend towards the weaker dollar appears to be fading away.

Although risk appetite remains high in the market, market participants have found a reason to be cautious. They are starting to wonder whether the euphoria of a vaccine breakthrough has got ahead of reality as the new coronavirus is continuing its spread across the world.

According to experts at Saxo Bank, November has been the strongest month in the global equity market history. Periods of strong risk appetite often give way to even higher gains. Although it is too early to say that the rally is over. The decline in the US dollar seems to be due entirely to lifted risk appetite and reflects it only passively.

Experts note that there are three events that could ruin the holiday at the end of the year. The first event is the rejection of the US stimulus package. The second risk is the Fed meeting to be held next week. The regulator may provide the market with less information than investors expect. Finally, US bond yields could skyrocket, starting with a breakout of 1.00% mark. This could trigger overvalued stocks and, as a result, a sell-off in the market, experts added.

The main currency pair is trading near the 1.2100 mark in anticipation of the ECB's monetary policy decision.

Market players have so far refrained from sharp movements in one direction or another. However, the more sudden the outcome of the December ECB meeting turns out to be, the higher the volatility will be.

Although the regulator made it clear that it intends to take measures to support the eurozone economy, the fact of what measures will be remains in question.

The ECB is expected to keep its key interest rate unchanged, increase the size of its pandemic emergency purchase programme (PEPP) by at least € 400-600 billion, and extend it until the end of 2021.

In October, the regulator announced the downward nature of the current risks, but the start of a mass vaccination campaign in the EU could improve the prospects. There is still a high degree of uncertainty, but the recent macroeconomic statistics from the region cannot be called downbeat. In particular, the latest releases from Germany have been positive rather than negative. The indicator of economic sentiment and industrial production in the country grew at a stronger-than-expected pace. It is not yet clear whether this news will be reflected in the ECB's forecasts. If the regulator revises any component of its outlook upwards, the euro could gain in value.

However, the strong single currency in the current environment is a serious problem for the region. Since the last meeting of the ECB, the euro has advanced against the US dollar by more than 3%. In fact, the euro jumped from $1.1700 to $1.2175, but this week it has lost ground slightly.

ECB officials watched the euro/dollar pair with dismay back in October, when the price broke through the 1.1900 mark. Now they seem to be even more concerned as a strong regional currency offsets its monetary policy easing. Can their fears of the exchange rate offset their optimistic comments? No, probably not. However, given the euro/dollar pair's recent rally, it can be said that a correction is around the corner.

At the same time, the answer to the question of which direction the main currency pair will go in , upward or downward, also depends on the results of the talks on budget stimulation. Their favorable outcome will have an adverse impact on the safe-haven dollar, and vice versa.

The greenback may decline even lower if the decision on the US economic stimulus package is made soon, strategists at Commonwealth Bank believe.

They expect the euro to reach the mark of 1.2400 against the US dollar by the middle of next year.

According to MUFG experts, if EU leaders are able to agree on the 2021-2027 EU budget, this will help approve the European Economic Recovery Fund without unnecessary delays. This, in turn, will provide Europe with additional fiscal support starting next year. This, along with the absence of serious obstacles from the ECB, will allow the euro/dollar pair to stay in the new trading range of 1.2000–1.2500.