Euro Dollar Rate Forecast: EUR Recovers as 1.35 Level Continues to Act as Support

We are meanwhile seeing the euro pound exchange rate recovering some lost ground as technical traders take advantage of severely oversold conditions; the EUR/GBP exchange rate is located at 0.7979.

The euro to CAD is at 1.4731 and the Euro to AUD is at 1.4473.

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Euro strength or US dollar weakness?

The US dollar is giving back gains and a new currency analysis from Swissquote Bank says:

"Not only that ECB’s stimulus package failed to trigger the EUR/USD sell-off that the rate differentials would suggest, but the EUR-longs jump back in the game a week after the verdict. The bearish EUR trend has hard time picking up versus USD, quite disappointing for ECB which has played big at last week’s policy meeting(!)

"Now, we believe that the EUR/USD strength should be mostly explained by broad USD weakness and the dovish bias in Fed expectations. We can read the USD-negative pressures through low US yields."

Nevertheless, we must not ignore the recent weakness seen in euro and the implications they present from a momentum perspective:

"The currency remains in a downtrend versus the U.S. dollar and 1.35 is looking extremely vulnerable.  While we have said that low volatility could limit losses in the EUR/USD to 1.34/1.35, if Janet Yellen has anything positive to say about the economy or the Fed raises its forecasts, this zone of support could give way," says Kathy Lien at BK Asset Management.

As for the ECB, the market will soon realise that they are comfortable with recent changes in monetary policy and will want to wait a few months to see how the economy responds before taking additional action.  

"A period of steady policy should help to stabilise the currency but it may be another week or so before the downward momentum in euro begins to ease," says Lien.

As mentioned, interest rate differentials are increasingly important in forecasting and explaining currency levels.

According to Swissquote the euro exchange rate may have seen the worst of the selling pressure as a result:

"Interest rate differentials continued to play the primary role in FX pricing as policy arbitrage further evolves into the trade strategy of the summer. On this basis, we suspect that current EUR/USD pullback has all but finished its recent move."

Nevertheless, the broader usage of EUR as funding leg in the carry positions favour GBP, NZD, AUD and EM currencies and should indirectly weigh on EUR/USD levels.  

"Since the introduction negative rates, the ECB has been successful to trigger the carry strategists’ attention. How long will it last is the question, nonetheless we do not believe that EUR/USD will step into a short-term bullish reversal pattern this early," say Swissquote.

European rates trade sideways as ECB's bold decisions to push rates into the negative territory, sent liquidity back into
the marketplace (and instilled a lingering deflationary theme).

However, in broader terms, yield ranges remain very much contained.

"With ample liquidity swirling around and the search for any yields creating a convergence of quality, it’s unlikely that US yields will surge higher this summer," say Swissquote.