Euro in 2021: 1.1000 or 1.3000?

It peaked near 1.2350 in early January and the selling pressure increased. In the middle of last month the pair was looking for support around the 50 SMA, but towards the end of January it slid under it. Decreasing below that level for now looks like a worrying new stage for the Euro. Let's look at several scenarios.

According to the first scenario, the pressure on the dollar reached its peak at the beginning of the year, after which it reversed to growth. Prior to that, we saw three impulse waves of growth: May-June, July, and November-January. Each wave was followed by a consolidation or a shallow pullback. However, by early February, there was a EURUSD reversal, mirroring the preceding growth with a steady trend towards lower intraday highs and lows. Now, at the time of writing, the EURUSD is testing the 1.2000 area, having gained back about half of the gains from November through January.

Technically, the support line for the pair is even more important than 1.2000. At these levels the pair was firmly prevented from rising last August, and a break of this area in November was marked by a powerful rally and a temporary capitulation of the bears. A breakdown of this defensive line (this time by the bulls) will signal for a prolonged EURUSD decline and question the assumptions about the start of a multi-year dollar decline.

Euro to dollar exchange rate today

The pressure on the dollar in 2020 was due to a more alarming pandemic pattern, which required more stimulus and hurt the dollar. Now the wheel has turned: Europe is stuck with vaccination, and the number of new cases stubbornly refuses to go down.

Additionally, the U.S. support package has been delayed, which means fewer dollars are circulating in the economy than the markets had previously anticipated.

However, this scenario still appears to be a back-up scenario, not the main one. EURUSD has lost its growth momentum along with the slippage of the support package in the US, but so far lawmakers there have not abandoned the economic stimulus and the checks to the population.

By solving some problems, the states are strenuously accumulating others. Worse, the direct distribution of money to the population is a powerful pro-inflationary factor, because consumers do not spend the money to pay off excessive debt, as they did after 2008. Now Americans are doing much better with personal debts.

But things are worse with debt at the national level. The debt-to-debt ratio is soaring to the highs since World War II. In the postwar years, the United States "deflated" debt through inflation and financial repression (maintaining bond yields). The process went particularly quickly with the abandonment of the gold standard. By buying U.S. government bonds and helping 10-year government bond yields fall well below 2%, the Fed is similarly reducing the real amount of government debt.

Changing strategy and targeting 2% over an extended period of time is the legal basis for holding above target to deflate some of the government's debt burden.

It is not advantageous for Americans to maintain a rising dollar because it suppresses inflation and reduces international competitiveness.

At the same time, the U.S. needs to convince the world that it is not wise to dump treasuries into the market at a time when the Treasury needs to place abnormally high amounts of government bonds. The most sensible thing for them to do would be to convince the rest of the world that , thereby ensuring demand for new issues.

This makes the growth of the dollar short-term. Perhaps episodic. The dollar could rebound to 1.1750-1.1950, parallel to the bond offering. However, a return to normalcy would raise the question of how to live with the accumulated legacy of the pandemic.

Europe looks much less burdened in this case. In addition, it is not engaged in trade wars with China, which is also favorable for the interest in the euro as from the NBK.

According to this scenario, the EURUSD correctional pullback in the nearest days and weeks to the area of 1.1800 will be followed by a new impulse of euro growth with the initial target at 1.2500 by the middle of the year, 1.3000 by its end.