It euroThis has been due to a rebound of Covid-19, European Central Bank Policy Divergence and Political Uncertainty.

On Tuesday, Europe’s common currency had fallen 2.6% in December and 7.8% in comparison to the previous year. dollarThe, has also been weaker against major currencies.

Last week, Germany and the Netherlands reintroduced strict measures. Covid-19 containment measuresThere are concerns regarding the Euro zone’s recovery from the fourth wave infected across Europe.

Despite the fact that inflation is rising, the ECB remains hesitant to raise interest rates. Other central banks, however, have already indicated this.

Christine Lagarde (ECB President) stated that when the bank is confronted by supply-driven, passing inflation shocks, it should not “hurry into a preemptive tightening.”

On Tuesday, the euro edged higher after the November euro zone purchasing manager’s index readings showed a surprise uptake in business activity. The data reaffirmed the idea that the ECB could tighten policies towards 2022.

Zach Pandl is co-head for foreign exchange strategy Goldman SachsFriday’s note by, suggested that some of the Euro weakness against the greenback may be due to changing expectations about Federal Reserve Policy, given the hotter than expected October inflation report.

He said that “To some extent these risks now seem priced in: remarks from Fed Governor Waller, Vice Chair Clarida Friday that the FOMC could accelerate the pace QE tapering had limited effects on EUR/USD.”

The dollar index measures the greenback’s value against major currencies and hit Monday its highest level since July 2020. Pandl suggested, however that euro weakness could be due to Europe-specific reasons such as new activity limits in continent economies and ECB’s dovishness.

Goldman Sachs holds short positions on the euro against the Swedish krone, the Polish złoty and the Czech koruna. The trader shortens currency to indicate that they believe it will decline over a period of time in comparison with the other.

Overlooked trade balance

Its latest foreign exchange position analysis shows BMO Capital MarketsHighlighted that leveraged funds were reducing their long-term bets on dollar across different pairs with greenback increasing by 7.2% on the year to date DXY U.S. dollar indexAs at Monday’s close.

However, in the week up to Nov. 16, the dollar-euro cross was among the few areas in which dollars longs increased. From $5.1 billion the previous week, EUR/USD’s net short position rose to $5.7billion. However, outright EUR short positions increased almost 11,000 contracts to reach a total of $14.3billion.

In a Monday research note, Stephen Gallo, BMO European Head for FX Strategy, stated that “the EUR is undergoing a fundamental reorientation which is not just related to expectations of ECB Policy divergence with other central bankers, new COVID-19 restraints in some EU members states and moderate-to high political risk.”

These factors being important, we rank Q3’s deterioration of the Euro Area’s balance of trade as the main driver of EUR weakness. This has continued to impact the EUR in Q4.

Gallo highlighted that a narrow measure of the euro’s nominal value — its unadjusted weighted average value relative to other major currencies — fell by 1.2% in the third quarter and is down by a further 2.5% in the fourth so far, as of Friday’s close.

According to Eurostat data, the euro zone had a surplus of 4.8 billion euros with other countries in goods trade in August 2021. This compares with 14 billion euros for August 2020. In September 2021, the total trade surplus was 7.3 billion euros, compared with 24.1 billion for that month in 2020.

Gallo explained that EUR requires an embedded medium-term “energy security risk discount” in price.

“In the near-term, an increase in oil prices to the downside will act as a buffer underneath the EUR. However, we argue that the large number of negative fundamentals would likely outweigh the positive effect of a lower price for oil.”

Even though net trade could see some of its cyclical effects diminish over the next 2 years, Gallo suggested that structural shifts such as “de-globalization”, and attempts to achieve carbon neutrality might not have the same positive impact on eurozone export growth as the previous 20 years.

Gallo said that “Looking forward to the end of this year, positioning EURUSD may act as an inhibitor on downside momentum.”

We also consider the Fed’s interest rate increases already included in the USD curve up to 2023 as an upside risk for EURUSD. If something happens, we would be happy to take them out.

BMO offers a range of estimates for one to three months at $1.11-1.16 per euro.