Too Soon to Expect Euro-Dollar Rebound, but Forecast at 1.27 by Year-end at Soc Gen

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2021 will still be a year of decline for the U.S. Dollar say foreign exchange strategists at Société Générale, but a rebound in the Euro-to-Dollar exchange rate (EUR/USD) is unlikely in the first of the year.

The findings suggest the current stagnation in the Euro-Dollar over recent weeks is likely to persist for some time, ahead of a resumption of the uptrend that characterised the second-half of 2020.

"Our forecasts reflect a belief that US policy and vaccine optimism will give the global economy a big boost and that this will be broadly dollar-negative this year. However, there are caveats," says Kit Juckes, lead currency researcher at Société Générale in London.

These caveats will likely stall the Euro's advance against the Dollar, they include:

1) an outsized 'long' position that could keep EUR/USD in check in the first quarter of 2021.

2) rising bond market yields could deliver some near-term pain.

"While rising US bond yields are not a major problem for asset markets when they are still low, especially in real terms, a sudden adjustment can cause equity markets some pain. The Fed’s main task in the weeks ahead may be to ensure that the market correction remains orderly," says Juckes.

3) Soc Gen think the Dollar’s low point will come this year, not in 2022.

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Juckes says the Dollar is currently being pulled in two directions.

On the one hand generous fiscal support programmes from the U.S. government combined with the ongoing stimulus from the U.S. Federal Reserve will prove supportive of global economic growth in 2021, particularly when combined with vaccinations and decline in global covid cases, the is already underway.

These dynamics typically weigh on the Dollar.

On the other hand, markets might not keep faith with the view the Fed will stick to its plan to keep rates low through to 2023, a view already being expressed by rising yields on U.S. ten-year bonds.

This dynamic is typically supportive of the Dollar.

How this tussle resolves will ultimately determine how the world's de facto currency trends over coming months.

The EUR/USD exchange rate is forecast at 1.23 by mid-year, 1.25 by the end of September and 1.27 by year end.