Covid-19 will remain a major headwind as news of new virus strains and cases permeates the markets. Keeping currencies like the euro hedged would be prudent.

Thankfully, this is made possible with ETFs like the Xtrackers MSCI Eurozone Hedged Equity ETF (DBEZ), which seeks investment results that correspond generally to the performance of the MSCI EMU IMI US Dollar Hedged Index. The index is designed to track the performance of equity securities based in the countries in the European Monetary Union, while seeking to mitigate exposure to fluctuations between the value of the U.S. dollar and the euro.

In the foreign exchange currency market, or forex for short, the U.S. dollar could be gaining more steam against its European counterpart.

“The markets seem keen to believe that greener pastures are indeed ahead, spurred on by encouraging results for three competing Covid vaccines set to hit the market soon,” a DailyFX article said. “A clear outcome to the US presidential election and a begrudging resignation to transferring power by the Trump administration have also helped sooth traders’ nerves.”

“A by-product of this optimism has been a shift away from dovish extremes on Fed policy bets, implying that the central bank may consider pulling back stimulus faster than previously thought,” the article said further.

Meanwhile, DBEZ continued to track above its 50-day moving average as 2020 concluded. Its relative strength index (RSI) is approaching overbought level, but the moving average convergence divergence (MACD) filter shows the exponential moving average is still below the signal line.

DBEZ Chart

Will the European Central Bank (ECB) Match the Fed?

Fundamentally, the strength of the euro will still be in the hands of the European Central Bank (ECB). If the Fed gets more aggressive with monetary policy, there’s no guarantee the ECB will do the same.

“One major central bank unlikely to pace the Fed down this road is the ECB,” the DailyFX article noted. “Stubbornly sub-target price growth had the central bank flirting with exotic easing measures like negative interest rates well before the pandemic struck. The structural issues at play there are unlikely to have vanished.”

“A yawning gap between US and Eurozone breakeven rates underscores this, suggesting that the Euro may turn lower as the global monetary policy pendulum gradually retraces,” the article added.

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