Euro-Dollar Rally Forecast to Resume

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- EUR/USD has been in an uptrend since Oct.

- Declined in wake of Soleimani killing

- U.S. data to be key driver of EUR/USD going forward

The cooling of tensions in the Middle East has allowed the Euro to recapture some of the ground it lost to the Dollar in the wake of news the U.S. had killed senior Iranian military commander Qasem Soleimani, and technical analysts suggest the Euro-to-Dollar exchange rate is in the process of restarting its uptrend.

The EUR/USD exchange rate is quoted at 1.1185 on Tuesday, January 07, but had been 1.1124 on Friday 03 after markets reacted to news of the U.S. air strike that targeted Soleimani as he departed an airport in Baghdad.

The exchange rate has since managed to recover much of the ground lost, with the Euro recovering against the Dollar at the start of the new week as markets corrected the knee-jerk reaction to news of the killing.

The Dollar tends to benefit in times of geopolitical stresses, but geopolitics can often have a short shelf-life, and the latest U.S.-Iran tensions are thus far proving to be limited. The support for the Dollar provided by the event has therefore been fleeting. "Due to a lack of further bad news from the Middle East the euro has been able to do well," says Antje Praefcke, an analyst at Commerzbank in Frankfurt. Praefcke says as long as there is no more bad news regarding the Middle East, "the start of the year might therefore remain positive for the Euro."

According to Ewen Chew, an options analyst at Thomson Reuters, EUR/USD is set to see its rally resume. "Closing above 1.1186 reaffirms Bollinger uptrend channel," says Chew, "may probe intraday resistance - ceiling of channel near 1.1230."

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Chew notes a "stiff bounce" in the exchange rate from Friday's test of the 200 Day Moving Average support encourages a bullish stance on EUR/USD, while the convergence of the 20 Day Moving Average and 200 Day Moving Average near 1.1142 strengthens the base.

The JP Morgan foreign exchange dealing desk say in a note out Tuesday that they "continue to be constructive on the Euro and increased our conviction levels a little bit yesterday."

However, "we are certainly cognizant that at 1.12 we are well off the lows now and, using recent history as a guide, a failure and pullback to 1.10/1.11 is hardly impossible," says the note.

Looking ahead, "barring the unlikely event of a full-scale Middle East conflict, the market will shift focus to economic fundamentals and central bank expectations," says John Noonan, a currency market analyst at Thomson Reuters.

With the state of the U.S. economy likely to dictate direction in the EUR/USD, all eyes will be on the release of non-farm payroll data, due out Friday.

"The data takes on more importance after the extremely weak U.S. ISM manufacturing release last Friday," says Noonan. "A weaker-than-expected U.S. jobs report will heighten concerns that the Fed is overly optimistic in its upbeat assumptions for the U.S. economy in 2020."

Noonan says a dovish shift in Fed expectations could see EUR/USD resume the short-term uptrend that dominated price action for most of December.

The Euro has meanwhile also benefited from the release of some better-than-expected data, with final PMIs for December released thus far in January suggesting the Eurozone economy is starting to pick up from its 2019 slump. 

"The more positive PMIs provided significant support for the euro at the start of the year. The indices for the industrial sector suggest that the situation is stabilising which is allowing recession fears to ease; but it is the service sector indices in particular that convince. After the service PMI in Germany had already risen to 52.9 points the final euro zone index for December surprised with a rise to 52.8 yesterday. Even if there are hardly any signs for a turnaround in the industrial sector it is a positive sign that the service sector is proving resilient, thus supporting growth," says Commerzbank's Praefcke.

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