Euro to Grind Higher into 1.1450s v Dollar say HSBC

Don’t wait to buy your Euros, as the currency is likely to get more expensive against the US Dollar the longer you delay.

The Euro has been on the rise ever since it touched lows of $1.03 in January. 

Recently it reached the $1.1300 resistance level before selling pressure pushed it back down to the current 1.11s.

The technical cieling at $1.13 will probably give way eventually, according to analysts at HSBC, who see the currency “grinding higher” to the $1.1450s, at least.

The rally is likely to be fuelled by improving Euro-area economic data which will increase pressure on the central bank to normalize its monetary policy.

The European Central Bank (ECB) currently has a QE programme in which it buys 60bn of bonds per month to keep interest rates low, in attempt to stimulate lending and maintain economic growth, however, one side-effect of these policies is to weaken the Euro.

But as the economy has improved an increasingly voluble chorus of ECB officials have questioned the necessity of the programme.

“The more hawkish elements of the ECB are likely to continue their calls for a debate around the appropriate size and duration of QE. Weidmann has warned of the dangers of excessive QE. Nowotny believes tapering will be debated in the coming months,” says strategist Maher Draga in a briefing dated June 16.

The commentary from the ECB contrasts with that of the Federal Reserve where the timing and frequency of future rate hikes is increasingly being questioned.

“This shift in tone is more significant because it is happening when the debate in the US is moving the other way, questioning whether the Fed really will need to deliver that sequence of hikes pencilled into the “dots”,” says Daragh Maher.

The contrast will probably propel EUR/USD above the 1.1300 mark, “ to 1.1450 thereafter and ultimately a challenge of the May 2016 high of 1.1618,” he added.

Even moribund inflation, as witnessed in this morning’s lacklustre May CPI data are unlikely to prevent gains.

“Sombre inflation could also be tolerated by EUR bulls so long as the growth story remains upbeat,” says Maher.

Expectations of a removal of QE alone in fact may be enough to spur the Euro higher.

“An upside surprise on an inflation print is not a necessary element for the EUR to rally, however. The fact that the conversation around the ECB has moved to contemplate the evidence is significant enough. It is reminiscent of the 25% USD rally in 2014 in anticipation of a US policy normalisation that has yet to happen,” added the analyst.

The Euro may also gain a further backdraught from the less provocative political landscape in Europe.

With Maher saying, “Politics also looks unlikely to challenge the EUR’s upward momentum. French parliamentary elections look set to deliver a strong mandate to the pro-Europe “En Marche!” party of President Macron. The potential for Italy to provide fresh intrigue has fallen following the failure to agree on electoral reform, which makes a snap election unlikely. The poor showing of the euro-sceptic Five-Star Movement in local elections recently gives further cause for comfort.”

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