Euro dollar exchange rate (EUR-USD) outlook constructive near-term but "weak credit growth and low inflation remain conce

The euro dollar exchange rate (EUR-USD) is nudging back towards the upper end of the recent trading range but without much of a strong sense of conviction.

The resilient euro retested its highest level of this year against the greenback. Depressed U.S. bond yields amid a string of disappointing economic reports have dulled much of the dollar’s appeal at the start of the New Year.  

The euro dollar exchange rate (EUR/USD) is trading 0.32 pct higher on a day-to-day basis having reached 1.3751. "EUR near-term pressure remains bullish; but that has not shifted our longer term bearish outlook," notes an exchange rate outlook note issued by Camilla Sutton at Scotiabank.

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Sutton says she is bullish on the outlook for the euro dollar in the near-term as all technicals have shifted back into buy territory; "the only warning on the charts is that the ADX at just 12 suggest there is no clear trend. Resistance lies at 1.3800."

As mentioned the longer-term outlook for the euro dollar rate remains less certain; German data today was a little disappointing and the broader recovery in the Eurozone remains fragile.  "Weak credit growth and low inflation remain concerns for policy makers and we think that further policy action from the ECB  to address these issues still cannot be fully excluded as a risk in the next few months," says Shaun Osborne at TD Securities.  

Osborne suggests there seems little to justify the EUR’s ongoing resilience—even from a backward-looking perspective; December’s Eurozone current account data revealed a net outflow on the portfolio account and not the massive inflows that were widely rumoured to have been the basis for the EUR’s strong year-end performance.

Agreeing with Sutton the TD analyst says, "we still rather think the broader risk in EUR/USD is lower and that gains (to the upper end of the recent trading range—1.37/1.38) are to be faded.

Meanwhile, the U.S. dollar put in a mixed performance overnight as U.S. trading centres reopen after the long holiday weekend.

"The greenback remained pressured against the resilient euro overnight but firmed against the British pound and the Japanese yen in generally quiet overnight trade. On balance, the dollar remains saddled by a recent run of disappointing economic reports that have raised questions about the sustainability of the U.S. recovery and about the expected pace of Fed monetary stimulus reduction," says Omer Esiner at Commonwealth Foreign Excahnge.

While investors still see a significant weather-related aspect to the below consensus U.S. data, there is a growing risk that a cooling U.S. recovery could prompt the Fed to slow its pace of stimulus tapering.

Those concerns have kept Treasury bond yields pressured and have dulled some of the dollar’s recent appeal.       

The British pound was the big loser overnight after U.K. CPI fell below the BOE’s 2.0% target for the first time since 2009.

The news came just a day after trade-weighted sterling hit its highest level in nearly five years. The cooler than expected inflation data is likely to ease some pressure off of the BOE to begin raising lending rates sooner than previously expected.