Euro-Dollar Lift Off Cultivating Better Opportunities in Neighbouring Currencies

- EUR/USD poised for marathon recovery venture, not sprint
- As burnt fingers & ECB’s caution confine EUR to slow lane
- But cultivates other opportunities in neighbouring currencies
- CEE shines as its fleet of foot central banks turn hawkish

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• Spot: 1.2245
• Bank transfers (indicative guide): 1.1816-1.1900
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The Euro-to-Dollar exchange rate has eroded a key resistance on the charts as its recovery from earlier losses continues, aided by a glacial decline in the greenback and new highs for China’s Renminbi, while the hesitantly slow pace of the move is helping to cultivate more opportunities in neighbouring currencies.

Europe’s single currency has climbed above a key technical resistance barrier at 1.2240 and may now be on route to 2021 highs that are only made more likely by the Renminbi’s nascent advance beyond a similar milestone barrier of its own, which looks to have lifted other boats in the market and kept the Dollar under pressure.

USD/CNH was probing further below the 6.40 level on Wednesday after the Peoples’ Bank of China (PBoC) set the midpoint of its daily fixing band for USD/CNY lower than was expected at 6.4099, down from 6.4283 on Tuesday, lifting other boats along the way and far beyond its local neighbourhood.

A rising Renminbi is a bearish development for the Dollar and by implication is positive for the Euro, which accounts for 57% of the ICE Dollar Index, although the Euro is also beginning to offer investors homegrown reasons for cheer of late too.

An improved supply of coronavirus vaccines and last week’s an ongoing relaxation of restrictions is paving the way for a reopening of major Eurozone economies and in the process helping rescue the continent’s prospects for economic recovery.

“We can't trust the euro's move until it's consolidated, and we'd really like it to have only token ECB opposition and support from decent data and rising bond yields. So far, this is a move with weak foundations, even if it suits our view. The wider backdrop is, however, still dollar-negative,” says Kit Juckes, chief FX strategist at Societe Generale.

Above: Euro-to-Dollar exchange rate alongside CNH/USD and USD/CNH.

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Euro-Dollar was climbing tepidly above 1.2250 on Wednesday but its journey back to what is the exchange rate’s highest level since late January has been a slow as well as arduous journey and could remain so for a while yet due to lingering scepticism in the market about whether the recovery is really sustainable.

Hesitancy on the part of investors and analysts comes after many had their fingers burned early in the New Year when European Central Bank (ECB) concerns about the impact of 2020’s rally on the Eurozone inflation outlook stalled the EUR/USD uptrend in January.

It wasn’t long then before a reluctant consolidation near to early January highs evolved into an all out correction as the continent’s vaccination disadvantage became clear for all in the market to see, leading to a lost quarter for the single currency.

Combining these factors with the ECB’s cautious assessment of current economic conditions and the outlook for the bloc’s economy offers a neat explanation for what Societe Generale describes as a recovery which could be “painfully slow” at times.

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But this dynamic is serving to enhance the already-better opportunities elsewhere in the European neighbourhood, though notably among currencies of faster growing Central and Eastern European (CEE) economies which typically have a higher susceptibility to inflation and so also central banks which are more fleet of foot than the ECB.

“HUF, CZK and PLN are currently occupying three of the top four slots on performance ranking this month against the USD and EUR,” says Kenneth Broux, a strategist at Societe Generale.

“Our house view is that the MNB will carry on with QE into 2022 but at a slower pace. EUR/HUF retreated below 350 last week and we think a retracement towards 335 is possible by the end of 1Q22,” Broux adds.

This month has seen central banks in Czech Republic and Hungary respond to the brightening European recovery outlook and resulting upside risks to their own inflation targets by preparing the market for interest rate rises as soon as the summer months of 2021.

Above: EUR/USD at daily intervals alongside EUR/HUF, EUR/PLN and EUR/GBP.

That places them far ahead of the ECB on the path toward monetary policy normalisation as well as in front of all central banks of other major industrialised economies.

This has led to speculation that the Bank of Poland could soon make a similar announcement and is a boon for all of the currencies concerned.

However, and in addition to being a feather in the cap for Central and Eastern Europe, the recent and ongoing uplift in those currencies is also helping the Euro-Dollar rate by providing it with headroom in the very same trade-weighted Euro exchange rate, increases of which have often in the past been a concern that has led the ECB to protest against EUR/USD rallies.

The four main CEE currencies including the Hungarian Forint, Czech Koruna, Polish Zloty and Romanian Lieve collectively account for around a sixth of the Euro area’s overall international trade and some 16.1% of the trade-weighted Euro exchange rate.

They also happen to be ‘high beta’ currencies, which means they tend to move faster and further than the likes of the Euro-Dollar rate itself.

“In CEE, most central banks have turned hawkish, suggesting that the start of a rate hiking cycle is close. We believe this is a game changer,” says Murat Toprak, a CEEMEA strategist at HSBC.