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Euro-dollar forecast for 2020

By Elena Berton

The euro-dollar forecasts for 2020 are pointing at a weaker greenback this year, as global growth resumes and political risk shifts to the US with the November presidential election

The euro lost value against the dollar in 2019, dragged down by trade conflicts, lacklustre economic data and assorted political risks.

With the new year under way, most analysts are predicting the greenback to head lower in 2020 after the solid run of the last two years, while the euro will gradually strengthen against the US currency – although not much.

Uncertainty from the UK leaving the European Union continues to weigh on the euro as the trade talks with the remaining 27 members – which are expected to get under way in the spring – look likely to be tense.

Brussels is sceptical of reaching a comprehensive trade deal by the end of the transition period on December 31, 2020, particularly as British Prime Minister Boris Johnson has ruled out any extensions beyond 2020.

The UK government’s willingness to diverge from EU standards and regulations is also likely to complicate the path towards the free trade agreement both parties hope to secure by year end.

Slowing European economic growth is also predicted in the first half of 2020, which will continue to have a negative effect on the common currency.

US foreign policy

In 2019, the euro was down by around 3 per cent after a 4.5 per cent loss in 2018.

The main catalyst for the two-year slump was the sharp change in US foreign policy after Donald Trump became president. In the last two years, the largest EUR/USD monthly decline was in March 2018, when the trade war with China began.

Concerns about slowing global growth and the impact of trade tensions have led many investors to seek safety in the greenback in 2019.

Last year, the EUR/USD rate was 1.1462 on January 1, hitting a year-high of 1.1468 on January 9. It ended 2019 at $1.1215 and since the start of 2020 has been hovering around the $1.110 mark.

When it comes to 2020, most euro-dollar forecasts agree that the dollar will weaken against the euro, with the dollar’s moves hinging on global growth and further developments in the US-China trade talks.

The signing of the “phase-one” trade deal between the US and China hints that trade war fears are abating. But it remains to be seen whether the global economy will be able to grow without the threat of trade conflicts.

For example, if China’s economic growth slows, it would shrink China trade and cut demand for European imports.

Trade war and Brexit

In their EUR/USD prediction, Nordea analysts are bearish on the phase-one trade deal because it falls short of solving the deep problems in the bilateral relationship between Washington and Beijing.

“We expect the US to continue to implement more restrictions on at least Chinese investments and exports of high-tech goods” they wrote in a note to investors.

“There is a real risk that Trump will now centre his focus more on the EU, though the timing is uncertain. In addition, as the November US Presidential elections approach, political uncertainty will increase,” they added.

Turning to Brexit, Nordea noted that crucial deadlines have merely been moved to the end of this year, and the risk of a hard exit has not gone away.

As a result, the Scandinavian bank is predicting the EUR/USD trend to remain at low levels and not bounce back until the world “convincingly and uniformly rebounds growth-wise.”

Improving global growth

Deutsche Bank analysts are betting on a EUR/USD exchange rate forecast based on the expectation that global growth will improve modestly into next year.

“While the next big move favours dollar weakness, the timing is trickier,” they said in a note, forecasting the EUR to trade at $1.20 by the end of 2020.

While Danske Bank’s chief analyst Jens Peter Sorensen has predicted the EUR would “slowly move” toward $1.15 by the end of 2020, he has cautioned markets could become complacent amid dovish monetary policies from the European Central Bank.

“We have a fairly benign view on the euro with it range-trading in the first quarter versus the dollar,” Sorensen said. “Even though we have the first steps toward both a trade deal and an orderly Brexit as well as some signs of a stabilisation in the global economy, this fragile recovery needs plenty of stimulus, especially in Europe.”

Goldman Sachs analysts have similarly predicted mild weakness for the dollar and expect the euro will trade at $1.15 by the end of 2020, marginally up from the current level. For bigger declines in the dollar, the economic recovery in the eurozone would need to pick up, the Fed would need to cut more and tariffs on China would be rolled back, the analysts added.

JPMorgan has a similar euro-dollar forecast, with the euro seen trading at $1.14 by the end of the year.

The common currency will rally more than 4 per cent against the dollar in 2020 in the world’s best foreign-exchange performance, according to the median estimates of analysts in a Bloomberg survey.

Forecasters agree that the EUR is set to benefit from an improving global economic outlook and fading political tensions. The Bloomberg survey predicts the EUR will end 2020 at $1.16.

Overvalued dollar

“Although uncertainties remain, the decline in tail risk should trigger a correction of several misalignments in the forex markets,” said Vasileios Gkionakis, head of forex strategy at Swiss bank Lombard Odier. “We expect the overvalued dollar to adjust lower, while at the same the EUR/USD should be supported by valuations and a pickup in global trade,” he added.

At the same time, global manufacturing has bottomed out and should slowly recover, Gkionakis noted.

A significant trade resolution as the US and China move to the second phase of their trade deal, particularly if it involves a meaningful rollback of existing tariffs, would likely push the USD much lower.

However, an eventual fallout in the trade truce would risk a global recession and the flight to safety would trigger another sharp USD appreciation.

US election question mark

The main question mark for the EUR/USD long-term forecast is the US election in November 2020, which could mark an eventful year-end for the financial world and set the dollar’s direction for the next couple of years.

Will Donald Trump be able to retain the presidency, if he survives impeachment? If not, what will happen with US foreign policy?

“We expect EUR/USD to trade at current levels and approach 1.16 by end-2020, with risks to the upside if the US Presidential election leads to a USD negative surprise,” strategists at Nomura said in a note.

Still, some analysts remain less bullish in their EUR/USD prediction for 2020.

Stephen Gallo, head of forex strategy at Bank of Montreal in London, expects a “flattish” rate for EUR/USD this year.

“Some portions of the economy have been resilient, but in other respects (the) euro zone is still very beholden to global trade developments due to dependence on external demand,” Gallo said.

FURTHER READING: GBP to USD prediction 2020: is the pound going to rally?

FURTHER READING: Brexit time: GBP/EUR predictions for 2020 and beyond

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