Can the ECB Curb the Euro's Strength?

EUR price outlook for 1Q 2021

• The ECB seems to have run out of ammunition in its battle to keep EUR/USD^[1] below the 1.20 level.
• The clear break above 1.20 in December suggests the ECB is now unable to curb the Euro^[2]’s strength and that further gains are likely in the weeks ahead.

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Euro Price Gains Likely in 1Q

The European Central Bank has made clear that it does not want to see EUR/USD^[4] above the 1.20 mark, once seen as its “line in the sand” for the pair, because of the negative impact of a strong Euro on both the Eurozone’s competitive trade position and its inflation rate. Yet it is hard to see what it can actually do about it now the pair is above that level, and that suggests further strength in EUR/USD in the weeks ahead.

EUR/USD Price Chart, Daily Timeframe (January 1 – December 30, 2020)

Source: IG

Targeting Resistance at 1.25

A clear target for EUR/USD bulls is the 1.25 level last reached in February 2018 and there is no fundamental reason why that should not be challenged even if the ECB tries hard to subdue the Euro to lift the Eurozone’s inflation rate. After all, direct intervention in the foreign exchanges is highly unlikely.

For sure, the ECB could ease Eurozone monetary policy still further in the first few months of 2021 to counter the impact on the economy of the coronavirus pandemic, and in the past that might have weakened the Euro. However the correlation between monetary policy and the level of the currency seems to have broken down recently so further