Euro-to-Dollar Rate Shakes Off Greenback Rebound as GDP Data and Currency Forecasts Upgraded 

- EUR shakes off recovering USD, eyes challenge of last weeks highs.
- After GDP upgrades, and as risk-aversion rises ahead of Fed update. 
- EUR/USD forecasts upgraded at Rabobank as charts point above 1.15.

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The Euro bit its thumb at a recovering greenback Tuesday when it shook off earlier losses and made a fresh advance toward last week's highs but the single currency is increasingly tipped to remain on its front foot in the coming months. 

Europe's unified unit received a boost at the North American open that lifted it back across the 1.13 handle Tuesday despite that risk appetite remained soft after major stock indices hit new highs in the prior session and as investors looked ahead to Wednesday's Federal Reserve (Fed) policy update that could be a dominant them over the coming days given how the bank has been instrumental in driving the equally historic stock market recovery off March lows.

The Euro had entered the session on the back foot like all non-safe-haven currencies but found support at 1.1250 before turning higher when Eurostat revised its estimate of first-quarter Eurozone GDP higher, a gain that built as the session wore on. Europe's economy contracted by -3.1% year-on-year in the first quarter when previously a -3.2% contraction had been declared. The quarterly fall was also revised from -3.8% to -3.6%. 

"EUR/USD traded down to a low near 1.1240 this morning primarily because of USD strength. EUR is firmer mostly against commodity sensitive currencies," says Elias Haddad, a strategist at Commonwealth Bank of Australia. "It faces upside risk later this week if there are any signs the “frugal four” (Netherlands, Austria, Sweden and Denmark) soften their stance against a EU‑wide recovery fund financed in large part by grants rather than loans. EU finance ministers meet on Thursday to discuss the EU’s €750bn recovery package." 

Above: Euro-to-Dollar rate shown at daily intervals alongside S&P 500 index futures (orange line)

At 1.1347 the Euro-to-Dollar rate had crossed over its 200-week moving-average at 1.1334 that if failed to conquer last week while increasing numbers of analysts see the upside growing for the single currency, given the strength of the nascent rally in stock markets and developments on the ground in Europe. 

"The risk on move that has dominated market sentiment in recent weeks has beaten back USD strength across the board at least since the middle of May. In addition to this the recovery in EUR/USD has been fed by a couple of significant EUR centric events," says Jane Foley, a senior FX strategist at Rabobank. "This may be insufficient to push EUR/USD back to fair value but may give the EUR a nudge in that direction. For this reason and given the current momentum in the market we have revised our EUR/USD forecasts and now see the currency pair at 1.14 on a 3 month view."

The S&P 500 briefly erased its 2020 loss in Monday's trade but corrected lower alongside other stock markets as caution took hold ahead of Wednesday's 19:00 policy update, which is important because Fed monetary policy will have raised the fundamental value of stock markets according to some popular valuation methodologies and has clearly encouraged investors to bank on a quick, robust economic recovery from the coronavirus. In turn, many currencies including the Euro have been following those stock markets higher. 

"The OECD’s estimate for purchasing power parity for EUR/USD stands at 1.40. Various other estimates of fair value put it around 1.25. We do not expect to see either of these levels in the foreseeable future but the news from the ECB and the European Commission should prop the EUR higher. Additionally, risk appetite in the market has been stoked by massive amount of fiscal and monetary stimulus which have put the safe haven USD on the back foot," Foley says. "For this reasons we do see scope for another dip in EUR/USD and on a 6 month view we see a pullback below 1.10."

Above: Euro-to-Dollar rate shown at weekly intervals 200-week moving-average.

Whatever the U.S. central bank says or does Wednesday, a growing line of analysts see diminished downside risks to the Euro in the wake of last week's larger than expected policy support from the European Central Bank and following the European Commission proposals for a 'Next Generation EU.' Those have both lessened the downside risks to the Eurozone economy and since then many forecasters have upgraded their projections for the Euro. 

Foley and the Rabobank team had looked for the Euro to fall as low as 1.05 against the Dollar later this year but now see it at 1.14 in three months before a decline back to 1.09 in six months. 

There are still banana skins on the road ahead and one of those came into view Tuesday when Hungary's finance minister described the EU recovery fund proposals as being "unfair" toward it, indicating scope for an 'East-West' rift among member states in the European Union to complicate negotiations in the Eurogroup this week and European Council next week.

The recovery fund proposals need to be unanimously endorsed as a part of the next seven-year EU budget, which is always controversial and could yet prove to be a bridge too far for some countries. However, the negotiating progress is expected to roll on through summer and it's not just the fundamentals headwinds that have lessened for the Euro because the charts are also increasingly advocating for upside too. 

"EUR/USD last week reached the 200 week ma at 1,1334 and is seeing some near term consolidation around here ahead of gains to the 1.1495 March peak. Dips are indicated to hold in the 1.1250/1.1170 band ahead of further gains to 1.1570, the 2019 high then 1.1815/22, the 61.8% retracement of the move down from the 2018 peak. Longer term our target is the 1.1862 2008-2020 resistance line," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.