There still remains a lot of uncertainty in geopolitical spheres as Covid-19 continues to wreak havoc on economies, but the promise of a vaccine roll out is also having its own effect. Looking at the EU, as well as its association with the US and the USD, there is some good news for Euro holders.

USD has weakened further and has allowed for the Euro to break above a key area of resistance around $1.20. It is an interesting development because there is added uncertainty in Europe ahead of a major ECB meeting.

However, in terms of Covid cases, there has been a significant drop off in new cases at key nations and this ties in with the UK rolling out the vaccine in a first for the globe this week. But, persistent weakness in the USD is also a very important driving factor behind the Euro strength as a whole.

PrimeXBT’s lead analyst Kim Chua has looked into the geopolitical factors and the impact on the forex markets with her expectation that the $1.20 mark could grow further to even test $1.25 next year.

EUR/USD breaking barriers

Further USD weakness pushed EUR/USD higher to break above a key area of resistance around 1.20 that kept its lid on EUR/USD throughout the past months. The EUR/USD has sped past 1.21 and also strengthened against most currency majors as a whole, with it also gaining against the Yen, GBP, and AUD.

Higher levels are ahead of the EUR/USD despite the ECB stimulus package that is to come on its final meeting of the year, December 10. This easing has been very well telegraphed to the market such that it may not weaken the Euro since most traders have already priced this in. Hence, the Euro is likely to continue rising since the stimulus measure could now be seen as boosting the economies, which will be positive for the Euro in the longer term.

One very important factor is the improving COVID situation across Europe. New COVID cases in France have been falling after peaking above 86,000 in early November. Cases in Spain are coming down to just above 10,000 from more than 25,000 on October 30th. In Italy, new COVID cases are increasing at a slower rate. The situation is Germany has also improved.

On top of that, positive vaccine news is also adding to more optimism. A poll done by Reuters reveals that economists now expect vaccines to be rolled out in the eurozone by early 2021 and most restrictions on economic activity will be lifted during Q2. As a result, they expect GDP growth of around 5% next year, and then return to pre-crisis levels within two years.

This fresh level of optimism has put European stocks back on rally mode, thereby also putting a bid under the Euro, as Euro being a risky asset” usually benefits from a positive sentiment.

Economic activity has also picked up in the eurozone despite the lockdowns. Germany reported a surprise drop in unemployment rate, while the Manufacturing PMI in Oct for the Eurozone was revised higher. Thus, the economy may not have been as badly hit as anticipated, which brings confidence back into the Euro.

A driving factor

The persistent weakness in the USD is also a very important driving factor behind the Euro strength and this weakness is not likely to dissipate in the short term. The appointment of Janet Yellen as Treasury Secretary in Biden’s administration has driven speculations that a bigger stimulus bill may be forthcoming next year on top of what is currently negotiated.

Janet Yellen is a widely known “dove” and was instrumental in the implementation of the huge QE under her watch as Fed Chairman. At present, while U.S. legislators have failed to reach an agreement on the current stimulus package, there are early signs that a $908 billion bipartisan proposal could be gaining traction.

Traders expect lawmakers to reach a deal eventually with them also facing a December 11 deadline to pass a $1.4 trillion budget or risk a shutdown of the government. A worse than expected US Non-farm payrolls released on Friday further exacerbates the weakness in the USD in the short term, thereby lifting the Euro against it.

Bigger EUR/USD push on the way

“An improving Eurozone outlook, coupled with the weakening USD gaining pace, leaves me to expect this breakout from $1.20 on the EUR/USD to give way to a move towards $1.23, with an eventual test of 1.25 early next year,” explained Chua.

Any temporary weakness in the EUR/USD after the ECB’s meeting this Thursday to announce its easing measures is likely to be bought up.

The EUR/USD weekly chart seems to confer with our opinion. From the chart below, we can see that EUR/USD has convincingly broken out of the $1.16-$1.20 area of consolidation that has kept it ranging for the past 6 months.

After not doing any big moves for 6 months, this breakout is expected to quickly move the EUR/USD up as there should be a lot of range traders that shorted the EUR/USD around $1.20 in the hope of buying back lower. These stop losses triggering should move the EUR/USD up rather quickly to hit $1.23.

All analyses provided by lead PrimeXBT market analyst Kim Chua. Traders can trade long or short Forex with the award-winning PrimeXBT, alongside cryptocurrency margin trading, Oil, gold, silver, stock indices, and more.