Euro Eyes Trip Down to August Lows but will Bounce from there says Commerzbank

© Grecaud Paul, Adobe Stock

- EUR approaches 1.1301 August low, a key level.

- 200-week moving average offers support at 1.1319.

- Single currency is undervalued, due a corrective bounce.

The Euro remains under pressure following a week of steep losses but the single currency is now undervalued and could be due a bounce higher over coming days, according to analysts.  

Poor Eurozone economic data, continued upset over Italy's budget proposals and concerns about the economic impact of President Donald Trump's trade war with China have all taken their toll on the single currency this week.

It is now nearing its August and 2018 lows against the Dollar, at the 1.1301 level, which has been described as the last line of defence for those hoping to see the exchange rate rise. If that level breaks, the bulls may capitulate. 

"EUR/USD remains under pressure following its recent failure at the 20 day ma at 1.1499 and has eroded support at 1.1411/15, the 78.6% retracement and 2017-2018 support line. At this point we will assume that there is scope for a retest of the 1.1319 200 week ma and 1.1301 recent low. This is expected to hold the down side. We will attempt to buy this dip," says Karen Jones, head of technical analysis at Commerzbank.

The 200-week moving average situated at 1.1319 also provides further support to the single currency and scope for a rebound. 

Key moving averages are often the site of major reversals in prices and the 200-week average is about as key as they get. 

 The 200-week average's proximity to the current market price is further reason to expect a rebound soon, as short-term technical-oriented traders enter the market to take advantage of the expected bounce.

Above: EUR/USD rate shown at weekly intervals.

A further reason to expect the 1.1300 level to hold is that valuations support a bullish rather than bearish outlook.

According to most models, the Euro is undervalued and the Dollar is overvalued so if anything the pair should be drifting higher towards 'fair-value' and not lower.

While currencies can remain miss-priced for years before righting themselves, the valuation factor is another argument in favour of a recovery.

A growing number of analysts also say the Dollar could be in the throws of it's 'last hurrah', given multiple risks on the horizon such as the midterm election on November 06.

This could lead to a divided Congress which would stymie the Trump administration from implementing further growth-boosting policies such as the recent tax cuts.

The US government is also nearing its debt ceiling and the Dollar is increasingly taking note of a stock market that has been under pressure in the last month.

Moreover, foreign investors appear to be shunning U.S. Treasury bonds as the go-to safe haven and with stocks now falling out of favour, a capital exodus could be in the cards. 

Yet there are also grounds to think the EUR/USD could break lower and plumb new lows over coming days, as the single currency faces more political risk at the weekend when Germans go back to the ballot box in the state of Hesse.

Opinion polls are showing a shift away from centrist parties that could undermine the coalition government. While Chancellor Angela Merkel's CDU-led coalition is likely to retain its majority, it is seen being cut to a stump.

A poor showing for the SPD, Merkel's coalition partner, might threaten the fragile alliance she has formed with the centre-left at the national level.

Furthermore, if the elections reinforce the anti-Brussels and anti-establishment narrative it could have the effect of causing even more uncertainty about the stability and long-term viability of the single currency.

Another risk to EUR/USD is that the Dollar may continue rising as the economic 'outperformance' theme continues to support flows into the greenback.

Analysts such as Richard Franulovich of Westpac bank say stimulus measures already implemented, including tax cuts and this year's multi-year spending bill that is set to inject $300bn into the economy before the end of 2019, may still provide further uplift.

As such, 1.1300 is a major 'make or break' level for the EUR/USD pair. A move below it would likely opening the floodgates to more downside, while a recovery from it might signal that a major bottom has been formed.

Advertisement
Bank-beating exchange rates! Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here