12.12.201900:55 Forex Analysis & Reviews: Euro - a box with a surprise?

The euro does not cease to amaze the market. The single currency remained on the sidelines more recently, trying to keep up with the dollar, and now claims to be the first in the EUR/USD pair. Analysts are considering an option in which the dynamics of the euro, which was previously declining, will increase.

Experts from a number of major banks positively assess the prospects of the euro in the coming year. Morgan Stanley forecasts that the euro will rise by almost 5% to $1.1600, while experts at ABN Amro Bank NV and Commerzbank AG expect growth to $1.1400 by the end of March 2020. However, such a rise in the Euro currency is possible only with stabilization of the eurozone economy and clarification of the situation with Brexit, analysts emphasize.

Potential changes in the ECB policy can also make adjustments to the dynamics of the euro. The new head of the regulator, Christine Lagarde, is convinced of the need to strengthen budgetary incentives to maintain economic growth and inflation in the region. Analysts do not exclude that in the medium term the ECB will have to adjust its inflation target to 2%. This will entail a number of large-scale changes, and the market will have to lay in the price the rejection of negative interest rates that apply in the eurozone. If this scenario is realized, the euro will lose its attractiveness as a funding currency, experts said. This will negatively affect the mood of investors, and they will have to consider other options for using the single currency.

Many market participants believe that the euro's use as a funding currency for carry-trade transactions has come to an end. We note that this year the single currency was actively used as part of this strategy and made a profit when investing in 20 of 23 currencies of developing countries, note in the Bloomberg agency.

The euro was also supported by a positive report on the eurozone business sentiment index, published on Tuesday, December 10. It turned out to be much higher than the forecasts of economists, as well as data on the index of economic expectations in Germany. According to a document presented by the ZEW Science Center, the index of economic expectations soared to 10.7 points in December from the -2.1 points recorded in November 2019. According to ZEW experts, the large-scale growth of the index is due to the high probability of an increase in exports and an increase in personal consumption in Germany. Positive dynamics was demonstrated by the index of current economic conditions and the mood index in the business environment of the eurozone. The ZEW report said that the mood in the business environment of the region climbed to 11.2 points compared to -1.0 points recorded in November 2019.

According to analysts, the dynamics of the European currency may be affected by any signals from the leadership of the US Federal Reserve or the European Central Bank. This impact will be negative if regulators' plans for monetary policy change dramatically. Such changes can provoke an explosive increase in the volatility of the dollar and the euro and trigger another rally of the EUR/USD pair.

Currently, the EUR/USD pair is in a global downward trend, which will continue next year, experts said. The classic pair was not very active on Tuesday, December 10, cruising near the levels of 1.1078–1.1079.

The EUR/USD pair started at 1.1081 this morning, showing a slight upward trend.

The pair traded near the levels of 1.1084–1.1085, not showing much activity. Experts believe that this lull is deceptive. The euro, paired with a greenback, is like a predator hiding in ambush and waiting in the wings.

According to analysts, the euro has not yet revealed all its trump cards. The European currency is able to show rapid growth and catch up in the short and medium term. Specialists are confident in the enormous potential of the single currency, which can be fully revealed in the coming year.