Euro Dollar Rate Enters the Summer Doldrums - Moves Dependent on Events in the USA

Fresh euro weakness was triggered early in the week by yet another disappointing German confidence survey - the ZEW survey declining for the seventh straight month coming in at 27.1 versus 28.9.

German investor morale dropped to its lowest level in 1 and a 1/2 years as geopolitical risks and slowdown in economic activity in May all weighed on sentiment.

A look at the rates as we enter the final session of the week shows:

• The euro dollar exchange rate is at 1.3534.
• The euro pound exchange rate is at 0.7906.
• The euro to Aus dollar rate is at 1.4451.
• The euro to Canadian dollar exchange rate is at 1.4535.

Be aware: The above quotes are taken from the wholesale markets, the numbers will attract a spread when passed on to consumers. An independent FX provider will however seek to undercut your bank's offer and deliver a rate that could yield up to 5% more currency in many cases. Please learn more.

A summer stalemate for the euro dollar rate

After all of the fanfare around Janet Yellen's semi-annual testimony on the economy and monetary policy, she ended up causing very little action in currencies with the euro dollar rate hardly moving.

More commentators are pointing out to us that Eurozone economic data is having little impact on the euro exchange rate, rather:

"The path of the currency will be dependent on the market's appetite for U.S. dollars and the divergence in the performance between Eurozone and U.S. yields," says Kathy Lien at BK Asset Management.

Lloyds Bank Research tell us this morning, "We therefore think EUR/USD looks unlikely to break out of the recent 1.35-1.37 range."

And Emmanuel Ng at OCBC Bank reckons: "Amid the summer doldrums, EUR-USD may be tempted lower in the near term given the current dollar backdrop with the 55-day MA (1.3656) expected to cap while interim support is also expected into 1.3530/50. In the interim, we remain directionally uncommitted."

Why is the euro exchange rate complex so resillient?

Looking at the big picture for the shared currency we see plenty of time dedicated to the discussion of the relentlessley firm EUR - the currency just won't sink despite the fact that the Eurozone economy is hardly moving.

"We expect EUR to be comfortable range trading between 1.35 and 1.37 until there is a catalyst to force it lower. We hold a year‐end forecast of 1.30," says forex analyst Camilla Sutton at Scotiabank in a note to clients.

The headline euro dollar rate (EUR/USD) remains firmly bid above the 1.3600 level at present and many analysts are wondering why the shared currency is not trading lower in light of the poor economic performance being delivered by Europe.

According to Boris Schlossberg at BK Asset Management there are two reasons for the euro's stubborn strength:

"The surprising decline in US long term rates with the benchmark 10 year still trading near the 2.50% yield level has provided little reason for speculators to establish aggressive dollar longs for the time being.

"However, perhaps the biggest reason for euro strength has been reserve diversification especially by the PBOC (People's Bank of China) which may be the unexpected buyer of euro in the market.

"In either case the euro has held steady above the key 1,3500 level and will likely not weaken until one or both of these dynamics begin to change."

The outlook for euro + dollar dominated by Janet Yellen

The strength in the US dollar is therefore playing a large part in the euro's overall weakness at present, and this week offers some interesting dollar-related news.

Schlossberg comments:

"This week's testimony by Janet Yellen could be key to the greenback movements. Ms. Yellen has been a staunch dove, suggesting that rates are likely to remain at the current level until well into 2015.

"However, this weekend's article by Jon Hilsenrath of the Wall Street Journal suggests that some FOMC members are beginning to warm up to the idea of an earlier timetable for a rate hike given the better than expected US employment picture.

"If Ms. Yellen echoes those sentiments in her testimony this week, the EUR/USD could see another leg down as US rates respond accordingly."

Global markets forget BES crisis

European traders are EUR-optimistic at the start of the week as insolvency concerns on Portugal’s Banco Espirito Santo dissipate as quickly as they appeared.

"As suspected, last week’s BES misadventure had no power to influence the sentiment in the Euro-zone; EUR/USD closed the week above 1.3600 and everything appears to be in order now," says a note from Swissquote Research.

While Swiss, French and German sovereign yields continue trading at year lows, we see easing stress vis-à-vis Italian, Spanish and Portugal 10-years.

The improved risk sentiment lifts EUR/USD higher to 1.3640 at the time of writing.

"For day ahead, we still see resistance between 1.3647/78 (50-200 dma); the support should come into play at 1.3576/1.3600 (Jul 7th low & June-July rising floor). The pair is likely to remain range-bound before FOMC Chair Yellen’s semi-annual testimony," say Swissquote.