Euro Forecast: EUR/USD Rate Rally Eyes January High

EUR/USD extends the advance from the start of the week on the back of US Dollar weakness, with the commodity bloc currencies trading to fresh 2021 highs against the Greenback, and the Euro may exhibit a similar behavior as the exchange rate breaks out of the descending channel from earlier this year.

It seems as though swings in risk appetite will continue to sway EUR/USD as the reserve currency still reflects an inverse relationship with investor confidence, and the exchange rate may continue to appreciate ahead of the next European Central Bank (ECB) meeting on March 11 as major central banks rely on their non-standard tools to achieve their policy targets.

A recent speech by ECB Chief Economist Philip Lane suggests the Governing Council will retain the current course for monetary policy as “the central bank is committed to recalibrating its underlying policy instruments if it detects any threat to the favourability of financing conditions,” with the board member going onto say that “we will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation.”

As a result, the ECB may continue to layout a dovish forward guidance as Lane insists that the central bank “will need to continue providing ample monetary accommodation for an extended period, even after the disinflationary pressures caused by the pandemic have been sufficiently offset,” but the Governing Council appears to be in no rush to deploy more unconventional measures as President Christine Lagarde emphasizes that “our preferred tool is the pandemic emergency purchase program (PPEP).”

In turn, EUR/USD may continue to retrace the decline from the January high (1.2350) as the ECB adopts a wait-and-see approach after expanding the PPEP by EUR 500B at its last meeting for 2020, but the recent shift in retail sentiment looks poised to persist as the crowding behavior from the previous year resurfaces.

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