Euro-Dollar Forecasts Raised at DNB Markets

- EUR/USD rally takes out 2021 forecasts
- EUR displaying strong correlation with equities says DNB
- But EUR/USD should be flat in 2021

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• EUR/USD spot rate at time of writing: 1.2254
• Bank transfer rate (indicative guide): 1.1827-1.1913
• FX specialist providers (indicative guide): 1.2100-1.2170
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With the Euro running higher against its North American counterpart, numerous analysts have seen their 2021 forecast targets hit before 2020 has even ended, forcing a rethink.

Scandanavian lender DNB are amongst them, with researchers telling clients this week they have raised their 3-month forecast profile for the Euro-to-Dollar exchange rate in response to the Euro's ongoing bull run, but have opted to keep the 12-month forecast unchanged as the exchange rate is expected to maintain a flat profile for much of the next year.

"Our previous short-term forecast for EURUSD, of 1.15, was based on an assumption that risk sentiment would weaken towards the end of this year, and that this would lead to a stronger USD against the EUR. As the opposite has happened, and with the December ECB meeting out of the way, we see few drivers for a lower EURUSD," says analyst Ingvild Borgen Gjerde at DNB Markets.

The Euro's ongoing run of strength appears to have its origins in the impressive equity market rally as DNB Markets have identified the EUR/USD exchange rate has built a close positive correlation with the performance of stock markets:

And if anything, that correlation has been growing as 2020 comes to an end:

"After trading more or less flat around 1.18 since August, EUR/USD has leapt higher in recent weeks, driven by the improved risk sentiment following the US election and the positive vaccine news in November. We had expected market sentiment to weaken in relation to the US election, not strengthen, and to stay more cautious towards the end of the year," says Gjerde.

Therefore, much of the Euro-Dollar rate's outlook could rest with the performance of equity markets going forward.

"We have raised our 3-month forecast to 1.20, the same as our 12-month forecast, which is unchanged," says Gjerde.

The Euro-Dollar rate has risen 2.75% in December, with the high coming in at 1.2258, which now places it above the three-month target held by DNB.

The 2.75% gain follows a 2.40% gain in November, making the final two months of the year particularly positive for the Euro.

But this is an exchange rate that is capable of entering long running sideways trends and it could therefore settle into a range before long.

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Despite the correlation DNB do not expect the exchange rate to rise much from current levels, even if equity markets continue higher.

While DNB Markets no longer see convincing reasons why the EURUSD should fall in the near term, looking beyond the three-month horizon they do not believe that risk appetite will remain as forceful a driver.

2021 is expected to see rising U.S. interest rates relative to Eurozone rates according to DNB Markets which could help the Dollar, and the current skewed positioning for a higher EUR/USD among speculative investors, suggest limited further upside in the EUR/USD next year.

"We see limited risk of either a much higher or a much lower EURUSD next year, hence our forecast for a more or less flat trend throughout 2021," says Gjerde.