Euro-Dollar’s Resilience Divides Analyst Opinion as Focus Shifts to Fed

- EUR/USD divides opinion ahead of Fed decision
- Defiance of USD's gravity leaves uptrend intact
- But vulnerability lingers beneath 1.1825, 1.1880

• EUR/USD reference rates at publication:
• Spot: 1.1760
• Bank transfers (indicative guide): 1.1348-1.1430
• Money transfer specialist rates (indicative): 1.1650-1.1678
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The Euro-to-Dollar exchange rate’s ongoing resilience has divided opinion among analysts as the market’s attention shifts toward July’s policy decision from the Federal Reserve (Fed), which is the next test of whether the single currency can continue to defy the gravitational pull of the greenback.

Europe’s single currency was an outperformer of other major counterparts on Friday as it gave little ground to the U.S. Dollar, which was again on its front foot ahead of the weekend having advanced against all in the G10 segment though with only limited progress against the Euro.

Better-than-expected IHS Markit reports of activity in the Eurozone’s manufacturing and services sectors released on Friday morning may partly explain the single currency’s resilience in the final session of the week, although the Euro-Dollar rate had also showed little concern about new and more ‘dovish’ interest rate guidance given by the European Central Bank (ECB) on Thursday in a continuation of its months-long display of resilience.

This ongoing defiance of gravity, which has continued throughout a seven-week stretch of appreciation by the U.S. Dollar that saw no currency left untouched, has gotten some analysts questioning whether EUR/USD might be forming a technical base from which it could eventually rebound even as others cite the steady erosion of earlier support levels for thinking that new lows could be ahead.

“While the pair has been relatively quiet and range bound in recent days, we do think it is interesting that spot managed to post both a slightly higher high and a slightly higher low amid yesterday’s ECB event,” says Ned Rumpeltin, European head of FX strategy at TD Securities.

“This puts our attention first on 1.1850, but we really think we’ll need a close above 1.1881 to change the market’s perception of near-term direction,” Rumpeltin adds

Above: Euro-Dollar rate shown at daily intervals alongside U.S. Dollar Index.

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The Euro-Dollar rate has been in steady decline since early in the New Year, although it has passed up on plenty of opportunities to wrack up heavier losses including both fundamental and technical triggers, and remained comfortably above its year-to-date lows of 1.1704 on Friday.

This steady drift lower has left the appearance of an uptrend intact on the charts and at first glance errs on the side of those arguing that the single currency is merely in the midst of a temporary correction, rather than seeing its year-long rally unravelling.

But others cite repeated failures to sustain moves much above the 1.18 handle as confirmation of a pending change in the overall Euro-Dollar trend.

“We continue to look for a clear break of key support from its recent low and “neckline” support from November at 1.1781/71 to add weight to our view we are seeing the formation of a large “head & shoulders” top to mark an important change of trend lower,” says David Sneddon, head of technical analysis at Credit Suisse, who tips the Euro for a steady decline to the 1.17 area and anticipates further losses beyond there.

Sneddon and the Credit Suisse technical analysis team cite 1.1825 and roughly the 1.1880 area in EUR/USD as key technical resistances that would need to be overcome in order for their bearish view to be neutralised.

There aren’t many analysts out there assigning very high odds to this happening however, while increasing numbers tip the Dollar for further gains.

Above: Credit Suisse chart shows EUR/USD at weekly intervals with technical indicators.

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“Our new FX forecasts look for EUR/USD to trade in a 1.16-1.20 range for the rest of this year before heading decisively lower as the turn towards Fed tightening comes into view. The near-term risk is that we visit the bottom of that range in the coming days,” says Kit Juckes, chief FX strategist at Societe Generale.

“One potential catalyst for a broader dollar rally is Chinese yuan weakness. Bloomberg news carries an article this morning citing Morgan Stanley strategists who think the divergence between Fed and PBoC policy could weaken Asian currencies. With short-dated Chinese yields falling significantly against US ones, they have a point, but this is positive for the dollar more broadly, never mind against Asian currencies,” Juckes adds.

Despite Friday’s resilience against the Dollar when compared with other currencies, the Euro has been unable to sustain itself above 1.1850 throughout July given the continuing advance of the greenback and this potentially sets up next Wednesday’s Federal Reserve policy decision as another possibly formative event in the 2021 Euro-Dollar story.

Last month’s update from the Fed led the Dollar to strengthen as investors wagered that the bank would announce as soon as September a plan to end its quantitative easing programme, and begin lifting interest rates as soon as the end of next year, although since the latest mutated edition of the coronavirus have taken hold in the U.S. as well as elsewhere and is currently placing a question mark over

Above: Euro-Dollar rate shown at weekly intervals with Fibonacci retracements of 2020 recovery indicating possible levels of support.