Above: ECB President Lagarde will likely on Thursday be answering questions about the Euro's rising valuation
- EUR/USD spot rate at time of writing: 1.2084
- Bank transfer rate (indicative guide): 1.1660-1.1745
- FX specialist providers (indicative guide): 1.1990
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The Euro exchange rate will be a source of focus for the European Central Bank in its December policy meeting on Thursday, but analysts are saying there is very little Luxembourg can do to combat the single currency's rise.
The Euro has risen above 1.20 against the U.S. Dollar this December, thereby crossing a line in the sand analysts say the central bank has been watching.
Indeed, when the Euro-Dollar exchange rate hit 1.20 in September ECB Chief Economist Philip Lane sounded a warning, and the exchange rate promptly declined and trended in a broader sideways motion until the end of November.
"The EUR’s latest rise is likely to be problematic for the ECB," says Dominic Bunning, Head of European FX Research at HSBC. "A stronger currency tightens financial conditions, which is incredibly unhelpful for an economy facing persistent disinflationary pressures."
A rising Euro tends to raise the cost of goods and services produced in the Eurozone on the international market, while lowering the euro-denominated profits of Eurozone exporters meaning the rally in the currency's value could be viewed by the ECB as working against the region's economic recovery and is therefore unwelcome.
"The ECB will also struggle to address the euro’s trend appreciation. Its disinflationary implications are unwelcome, but the rise in the currency is beyond the central bank’s control," says Brian Martin, Senior International Economist at ANZ Bank.
Above: EUR/USD in 2020
Most economists are of the opinion that the ECB will keep interest rate settings unchanged but that the quantitative easing programme will be expanded.
ANZ say an increase in the PEPP quantitative easing package of €650BN to around €2TRN is plausible.
The market is now meanwhile looking for €500BN more in bond purchases to be added to the overall quantitative easing package, with the programme extended into 2022.
"With expectations already elevated, it will become even more challenging for them to deliver a surprise that could knock the EUR off its perch," says HSBC's Bunning.
Indeed, increasing quantitative easing won't end the Euro's advance says ANZ's Martin.
"At best, the ECB might revert to more frequent verbal intervention to slow the currency’s rise," says Martin.
ANZ forecast the Euro-to-Dollar exchange rate will rise towards 1.30 medium-term with a year-end forecast of 1.28.
HSBC say the Euro exchange rate's rally appears to be a reflection of broader risk appetite and a weaker U.S. Dollar, as opposed to pure bullishness about the Eurozone’s prospects.
"The ECB may find it hard to stem the move right now. Of course, it may be that anything the central bank does is aimed less at reversing the move in the EUR but potentially slowing or limiting the move higher. However, if it cannot exceed easing expectations, the ECB risks being perceived as giving the green light to EUR strength," says Bunning.
EUR/USD Forecasts 2021
Period: Q2 2021 Onwards
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