EUR / USD: The euro is likely to remain relatively tight

The new blockades in the euro zone are expected to affect activity in the coming months, analysts from Wells Fargo. They want the European Central Bank (ECB) to announce an increase of 500,000 million euros in purchases from the Pandemic Emergency Program (PEPP) at its next meeting in December. They forecast EUR / USD to be 1.2300 over the medium term with downside risks.

Key quotes:

“After an encouraging initial economic rebound during the European summer, the euro zone economy is on the verge of a relapse in activity in the fourth quarter.”

“New lockdown restrictions in the major euro zone economies are expected to affect activity in the coming months and despite a large gain in the third quarter, we now expect euro zone GDP to contract by 7.4 % in 2020 “.

“We believe that the European Central Bank will increase its purchases of assets under its Pandemic Emergency Purchase Program in December. We also hope that the duration of that program will be extended until the end of 2021 ”.

“The monetary and fiscal stimulus measures should leak into the real economy and have a positive impact on the growth of the eurozone. In 2021, we forecast that the eurozone economy will expand by 3.7%; however, in the short term, we expect a more relaxed monetary policy and persistent uncertainty about the prospects for keeping the euro under control ”.

“At the moment, the euro is likely to remain relatively tight, especially considering the build-up in long currency positions. Risks to our mid-term EUR / USD exchange rate forecast of $ 1.2300 for early 2022 may also be tilted to the downside. ”