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New foreign exchange analysis from Bank of America suggests the Euro will have already witnessed the majority of its appreciation potential, just days into the new year.

Consensus amongst the analyst community is that 2021 will see the Dollar depreciate and the Euro-to-Dollar exchange rate (EUR/USD) rally, however that move might have already run its course says Athanasios Vamvakidis at Bank of America in London.

"We have assumed that EURUSD would be within its long-term equilibrium range during the year, 1.20 to 1.25, ending the year at 1.25; we are already in the middle of this range," says Vamvakidis in a briefing to clients on Jan. 08.

EUR/USD advanced 9.86% in 2021 and has risen 1.28% in the past month, reaching a 33-month high at 1.2350 on Wednesday before fading back to 1.2280 amidst a bout of Dollar buying.

A number of analysts are saying the move higher in EUR/USD appears to be a function of broader global risk sentiment and that the move is reflected in a rally in global stock markets, with investors looking towards an economic recovery in 2021.

"The move is not data-driven, as the US economy has been doing better than the Eurozone economy during the pandemic. Instead, it is driven by the rally in risk assets," says Vamvakidis.

Above: EUR/USD trending higher alongside the S&P 500 stock index. Get a money transfer rate just 60 pips away from the market, find out how here.

If correct, then how the EUR/USD trades over coming months could depend on how sentiment evolves.

"A risk-off market correction could trigger a EUR sell-off," says Vamvakidis.

For Bank of America's analysts, the foreign exchange market's positioning on the Euro and Dollar is a concern, with the market already heavily committed to bets for further EUR/USD appreciation.

As such, the Euro is at risk of any disappointing developments in the news flow. "Although the vaccine has been supportive, it could take longer than expected to vaccinate a critical mass and go back to normal," says Vamvakidis.

Bank of America maintain an end-year EUR/USD forecast at 1.25, "but see risks that this level could be reached much earlier, given current spot," says Vamvakidis.

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Dollar losses are expected through 2021 and 2022, however Senior FX Strategist Georgette Boele tells clients to be wary of a near-term Dollar rebound.

"Although we expect further weakness in the dollar and strength in EUR/USD this year, we think the move has been a bit too fast in thin trade. Some profit taking on the net-short dollar positions and the substantial net long euro is possible," says Boele in a note out Jan 08.

"Any correction would be an opportunity to position for dollar weakness further down the road," adds Boele.

ABN AMRO hold a forecast for EUR/USD at 1.25 at the end of this year.

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