Euro-Dollar Forecast Back at 1.20 by April by ING

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• EUR/USD spot at publication: 1.1860
• Bank transfer rates (indicative guide): 1.1440-1.1530
• Money transfer specialist rates (indicative): 1.1778
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The Euro-to-Dollar exchange rate (EUR/USD) is under pressure amidst signs the covid-19 pandemic in the Eurozone is growing, leading to lockdowns and expectations that the bloc will lag others in the economic recovery.

A number of analysts we follow are saying the exchange rate could well be on course to test the 200-day moving average over coming days, however the decline is being tipped to be relatively short-lived by analysts at ING Bank.

The Netherlands-based lender and investment bank tell clients in a regular weekly currency briefing that the Euro can retake the psychologically significant 1.20 marker in the coming weeks.

Key to any revival would however require the global investor backdrop to turn constructive, which is typically held by analysts to be supportive of Euro-Dollar upside.

The fundamental narrative guiding the Euro-Dollar rate is nevertheless challenging at present, given the sharp contrast emerging between EU and U.S. economic performance and expectations.

An accelerating vaccine rollout in the U.S. has combined with the sizeable $1.9TRN government stimulus package to stimulate Dollar demand, sending the exchange rate below 1.20 earlier in the month.

An environment of soft market sentiment over recent days is also meanwhile working against the Euro, sending the headline EUR/USD exchange rate back to 1.1866 at the time of publication.

Analysts and market commentators are pointing a finger of blame at rising covid-19 cases in Europe, where the region's major economies are entering tighter lockdowns. Tuesday saw Germany announce it would tighten restrictions to cover the Easter period, in the hope that infection rates don't run away over the holiday period.

"It looks like investors are paring back some of their excessively optimistic growth projections and end of lockdowns timing. They are realising that though there might be light at the end of the tunnel, it is proving to be an extremely long tunnel and we are still nowhere near the end of it. A surge in virus cases in mainland Europe, where the rollout of vaccines has been painfully slow, has cast doubt on resumption of travel in the region," says Fawad Razaqzada, Market Analyst at ThinkMarkets.com.

Razaqzada says the developments mean the Euro-Dollar rate is now at risk of testing the 200-day moving average at 1.1850, "below which there is not much further support until the lower trend of the bear channel at 1.18ish".

Lars Merklin, Senior Analyst at Danske Bank, says since the introduction of new lockdowns in Europe the negative effects on domestic demand is becoming clear.

This contrasts unfavourably with the U.S., where the trend performance of financial and investment assets continue to be strong and the COVID-19 pandemic has fast-forwarded the adoption of technology.

Merklin says this favours flows into the U.S.

Danske Bank have this month indicated to clients they are lowering their forecasts for the Euro based on the economic divergence that is emerging, adding that signs of a slowdown in the Chinese economy are an additional potential headwinds for the Euro.

Danske Bank now forecast the EUR/USD exchange rate at 1.19 in one month, 1.18 in three months, 1.17 in six months and 1.15 in 12 months.

This is a downgrade from previously held forecasts for 1.22, 1.22, 1.19 and 1.16, respectively.

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The key risks to this forecast are said to be 1) expectations on the U.S. recovery not being met, 2) the EU surprising on the upside and/or 3) the state of the next leg in US-China tariffs.

But ING's foreign exchange forecast team tell their clients they are more confident of a Euro recovery shaping up over coming weeks.

Short-term, a revisit to the 200-day moving average, now at 1.1855 is expected.

"Yet we see this as a temporary correction as Europe muddles through the crisis and still believe that a supportive risk environment can drag EUR/USD well back above 1.20 later this month and into April," says Francesco Pesole, Strategist at ING.

Much will depend on how soon the market looks through the current cycle of lockdowns in the Eurozone and start pricing in a recovery.

ING forecast the Euro-Dollar exchange rate to trade a range of 1.1855 to 1.2000 this week, but a one-month target is set at 1.2100.