A ship with a golden ‘B’ on its flag sails into the safe euro port

Last spring’s lockdown reminded us that the US dollar should be taken into consideration but at the same time, it confirmed resistance of the euro. At the beginning of last April, the trend turned and the euro started to strengthen against the dollar.

Last spring’s lockdown reminded us that the US dollar should be taken into consideration but at the same time, it confirmed resistance of the euro. At the beginning of last April, the trend turned and the euro started to strengthen against the dollar. By the end of November, it broke the level of USD 1.2 per euro and went even stronger at the turn of the year.* At present, the euro has been at its high since March 2018 and nothing indicates that it may direct at lower values. However, the value of euro as well as of other traditional global currencies will be increasingly affected by the dominant cryptocurrency bitcoin.

The coronavirus pandemic confirmed years of proven practice that when the going gets tough, investors seek security to deposit their money. It is not surprising at all that gold fulfils the function of such a safe haven. Its dollar price exceeded the two-thousand dollar level per troy ounce, hitting a fresh historic high. Also the time-proven US dollar has achieved the strongest values against the euro since 2016 immediately after the first coronavirus shock, specifically USD 1.088 per euro.

Last months’ development indicated what factors would come into play in creating the exchange rate of the euro to the dollar and other main global currencies. Traditional economic principles, such as interest rate differential, trade balance or expectation, seem to continue to apply. This year, however, the indicators will include development on the cryptocurrency market as the key factor.

Namely the developments on the bitcoin market show this year that the exchange rate of this oldest and most popular cryptocurrency will have a far more significant impact on the euro-dollar market than we have been able to imagine so far. When it turned out that the car producer Tesla had purchased bitcoins for USD 1.5 billion, investors literally threw their dollars to the market so that they could buy the cryptocurrency with a golden ‘B’ in its emblem.

However, it is not just about the volume growth of bitcoin as the means of payment and savings but also about regulation and, for example, the outstanding issue of bitcoin income taxation. The value of the euro will also be affected by the cryptocurrency-related considerations on the introduction of a single digital currency in the EU.

Another significant factor that will influence the euro value this year is the resistance of the euro area economy, which stands or falls on the German economy. The latest value of the ZEW index, which measures confidence in the German economy, has increased noticeably although the market expected a slight decline. The positive surprise had a beneficial effect on the strengthening of the euro against the dollar.

An important role will be played by the monetary policy of the European Central Bank and the US Federal Reserve, or their ability to influence inflation, i.e. the economic recovery in the euro area or in the US. Both central banks follow a similar and relaxed monetary policy. The Fed’s base rates are practically equal to zero while the ECB’s deposit rate is in a slightly negative territory but a higher inflation rate in the United States (compared to the euro area) makes real interest rates practically the same. 

We can expect that the central bank that will be the first to put the screws on the monetary policy will exert pressure on investors to put their liquid funds into its currency. The question is, however, how much the theoretical rule that a positive interest rate differential ‘absorbs’ foreign capital and affects appreciation of a local currency applies as there is an opposite effect of expected demand cooling, resulting from a tight monetary policy. Goldenburg Group analysis shows that this effect has been rather strong recently.

 

The development of trade balance is also positive from the euro’s perspective. The euro area traditionally reports excess of foreign trade, especially with the United States. From this point of view, the euro exchange rate should not get under pressure. Moreover, thanks to Joe Biden’s White House entrance we can expect that his foreign trade policy will be more open than that enforced by his predecessor Donald Trump. That should play into the hands of the euro area and the euro

The risk for the single European currency is the persisting slow pace of vaccination against the coronavirus. It is the vaccination that is key for the time horizon in which anti-epidemic measures could be eased. That will also be crucial for the speed of economic recovery and the resulting development of other macro-economic quantities having an impact on the exchange rate of the currency monitored.

In general, the prospects of the exchange rate of the euro to the dollar and other currencies for 2021 may be assessed as positive. It can be expected that the exchange rate will not significantly deviate from the current level of around USD 1.2 per euro. All that will apply on condition that the trends occurring in the European economy in recent months will continue. The key factor will be the development of the German economy, which seems to be very robust. In this respect, no change is expected from the elections to the German Bundestag to be held in Germany this autumn.

Tony Christoforou General Manager Goldenburg Group Ltd.

 

Goldenburg Group Limited is a fully licensed company, supervised by the Cyprus Securities and Exchange Commission (CySEC), with CIF License number 242/14, providing a comprehensive investment services internationally.

Disclaimer: The content of this material constitutes Marketing Communication and does not constitute Investment Advice or Investment Research or an offer for any transactions in financial instrument. The content of the material represents the view of our experts on a generic basis, and does not take into consideration individual readers personal circumstances, investment experience or current financial situation. In addition, the material has not been prepared in accordance with legal requirements designed to promote the independence of Investment Research, and is not subject to any prohibition on dealing ahead of the dissemination of Investment Research. Readers using the material should consider the possibility of encountering substantial losses. The past performance is not a guarantee of future results. Therefore, Goldenburg Group Limited, its relevant persons including affiliates, agents, directors or employees do not guarantee the accuracy, validity, timeliness or completeness of any information/data made available and assume no liability for any loss of traders arising from any investment made based on the said information/data and due to the use and the content of this material.

Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 82.14% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

* All figures are from: investing.com

Disclaimer: The content of the Reports constitutes Marketing Communication and does not constitute Investment Advice or Investment Research or an offer for any transactions in financial instrument. The content of the Reports represents the view of our experts on a generic basis, and does not take into consideration individual readers personal circumstances, investment experience or current financial situation. In addition, the Reports have not been prepared in accordance with legal requirements designed to promote the independence of Investment Research, and are not subject to any prohibition on dealing ahead of the dissemination of Investment Research. Readers using the Reports should consider the possibility of encountering substantial losses. The past performance is not a guarantee of future results. Therefore, Goldenburg Group Limited shall not accept any responsibility for any losses of traders due to the use and the content of its Reports.