EUR/USD: the pair's upside potential is limited

The EUR/USD remains on the short side with each market downturn. Since the ECB intervened verbally and pushed down the EUR/USD, the pair has not moved any closer to 1.20.

An interesting perspective on the EUR/USD pair is that if we use the 10-year average spread and the real effective exchange rate of the USD, the long term equilibrium value of the EUR/USD points towards 1.30. The EUR/USD has been on a downward trend since the ECB intervened verbally and pushed the EUR/USD lower. This is in line with the IMF's view that the common currency is too weak in relation to the current account surplus recorded in the zone.

However, all these calculations have been made under normal economic circumstances. But in the meantime, this year has shown us that an exogenous factor like the virus can change things in the blink of an eye.

Can the euro still climb in 2020?

The EUR/USD exchange rate is the most closely monitored part of the exchange rate scoreboard. It is also the main currency pair traded by retail accounts due to narrowing spreads and relatively high volatility. Many traders attribute the volatility of the financial markets to the EUR/USD - the saying goes that if the EUR/USD doesn't move, nothing moves.

To that extent, this year has been eventful. The pair has gone from 1.07 to 1.20 in just a few months. Moreover, it did so during the most illiquid months of the year - during the summertime.

Towards the end of the trading year it is unlikely that this month will bring anything new to the EUR/USD pair. The ECB will probably wait until the end of the year before extending the quantitative easing program, while the Fed awaits the outcome of the presidential election. As a result, until November the EUR/USD will likely trade between 1.16 and 1.18, either up or down due to discussions on US fiscal stimulus measures.

The USD's role as a safe-haven currency also plays an important role in the EUR/USD. If markets, and equity markets in particular, begin to take risks, the USD is likely to win on all fronts. As a result, the EUR/USD will find it difficult to move forward in a risk-reducing environment.

Many research companies are looking beyond this year and the consensus is for a much higher EUR/USD. Some believe that 1.25 or even 1.30 is possible for the next 13-16 months, mainly due to the weakness of the USD rather than the strength of the EUR.

Regardless of future potential, short-term expectations are that the EUR/USD will strengthen in the context of the presidential election and the ECB's easing decision. What happens next is the real issue for EUR/USD traders in the long term!