Euro / Dollar Rate Could Stabilise Above 1.0817 Line in Sand

  • EUR/USD in recovery after near miss with 1.08
  • Global markets rallying as energy prices retreat
  • Major Fibonacci support at 1.0817 holds so far
  • Close below places 2020 low at 1.0635 in view

Image © European Commission Audiovisual Services

The Euro to Dollar rate extended a tentative recovery from early 2020 lows on Tuesday, leading the European single currency to rise almost across the board while keeping intact a major technical support around 1.0817 ahead of Thursday’s European Central Bank (ECB) policy decision.

Europe’s single currency had tumbled further to open the new week as financial markets responded to further wild surges in oil and gas prices which appeared to weigh heavily on global stock markets and a wide range of other currencies.

But the Euro bounced strongly in the final hours of trading on Monday and extended that recovery alongside European stock markets during the Tuesday session, which also saw energy prices correcting lower in spite of suggestions from Moscow that Russian gas supplies to Europe could soon be curtailed.

“The 5.4% or [three standard deviation] drop since last week is the steepest since 1Q last year and leaves the pair technically oversold. Buyers are likely to stay on the side-lines though ahead of the US CPI and the ECB meeting on Thursday,” says Kenneth Broux, a strategist at Societe Generale.

Euro-Dollar had been quoted as low as 1.0808 on Monday, taking it momentarily below a major and long-term line in the sand on the charts before its ensuing and ongoing recovery stretched into Tuesday.

Above: Euro to Dollar rate shown at weekly intervals with Fibonacci retracements 2017 rally indicating likely areas of technical support for the Euro. Shown alongside selected long-term averages. Click image for closer inspection.

  • EUR/USD reference rates at publication:
    Spot: 1.0916
  • High street bank rates (indicative band): 1.0534-1.0610
  • Payment specialist rates (indicative band): 1.0820-1.0860
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Europe’s single currency was outpaced in its Tuesday recovery by only the Norwegian Krone and currencies from the Central and Eastern European neighborhood, which had all been even heavier fallers than the Euro during last week’s brutal sell-off.

“Importantly, the smaller adjustment in the EUR compared with other European currencies is partly a function of the high level of liquidity in the EURUSD exchange rate,” says Stephen Gallo, European head of FX strategy at BMO Capital Markets.

“The backdrop points to a period of less inward investment into Europe from abroad, weaker economic growth due in part to rising inflation, and a further deterioration in the trade balance due to the high price of oil. Therefore, we wouldn't judge the move in EURUSD as being over-extended yet from a fundamental perspective,” Gallo wrote in a Monday research briefing.

All but the perceived safe haven currencies were sold heavily in the final week of February after Russian military forces crossed the border into Ukraine, although European currencies were by far the biggest fallers; led by those in the CEE region.

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“We expect the European Central Bank to pause its hawkish transition, which looks unlikely to give the euro any lifeline. Still, markets will be on the lookout for any currency related comments. We think EUR/USD may remain under pressure until finding support around the 1.0640, 2020 lows,” says Chris Turner, global head of markets and regional head of research for UK & CEE at ING.

For Euro-Dollar and other Euro exchange rates much now depends on the latest European Central Bank inflation forecasts and its assessment of what the conflict in Ukraine means for its monetary policy outlook, with both due to be unveiled on Thursday.

“We expect geopolitics to delay, but not derail the European Central Bank (ECB) policy normalization plans. Firm commitments in this week's ECB meeting are unlikely though. The rush to end asset purchase programme (APP) is probably still larger than in December, but slower than before the war in Ukraine,” says Ruben Segura-Cayuela, a Europe economist at BofA Global Research.

“But with inflation forecasts likely to be very high in 2022, still at target (perhaps slightly above) in 2023, and slightly below by 2024 (see below), it is becoming increasingly difficult for the doves to argue that more accommodation (the stock argument behind asset purchases) is needed to bring inflation back to 2%,” Segura-Cayuela and colleagues said in a Tuesday research note.

Above: Dutch natural gas futures price shown alongside Brent crude oil price. Click image for closer inspection.