Euro Relief Short-Lived as Secular Dollar Bull-Trend has Further to Run

The euro to dollar exchange rate (EUR/USD) has powered higher bringing to end the relentless selling pressure.

• "USD bull trend to extend in line with its longer-term secular trends - roughly eight years up and eight years down on average since the 1970s"
• “Corrective EUR gains in the next few weeks (to the 1.08/1.10 region if that sort of bounce develops) are a sell against 1.11.” - Shaun Osborne, TD Securities.

How long the relief lasts remains uncertain; what is clear is that the potential for further losses remains possible with 4 trillion worth of Eurozone currency outflows likely.

“EURUSD steadies and a short-term bounce looks overdue—in line with a still quite oversold market and seasonal patterns through late Q1 and early Q2 which favour EUR gains,” says analyst Shaun Osborne at TD Securities.

At the time of publication the euro dollar rate is seen 0.67 pct higher on a day-to-day comparison at 1.0616.

The euro is also heading higher against the British pound; EUR/GBP is 0.80 pct higher at 0.7122.

The above quotes are wholesale rates, when making a payment from your bank account note that the exchange rate will differ. To get closer to the real market we suggest utilising a specialist dealer who can deliver up to 5% more currency in some instances. Learn more.

Euro Exchange Rates Catch a Break

The shared currency has finally caught a break as it bounced above fresh dozen-year lows seen just under $1.05 against the US dollar.

“The euro’s months long slide gathered pace this week after the ECB hit the start button on its gigantic bond buying program. The impact of the bank’s trillion euro program has been immediate, sending area interest rates sharply lower, which has watered down the euro’s value,” notes Joe Manimbo, analyst at Western Union.

Manimbo cautions that the euro’s bounce should prove short-lived as decidedly bearish fundamentals will leave it vulnerable to fresh selling pressure, a fall to and maybe below, parity is forecasted.

Declines are Too Fast

The team at TD Securities confirm they remain resolutely bullish on the USD in the longer run but say, “the EUR peeling off another seven big figures against the USD since the start of the month has just felt a little too much after such an extended run lower.”

It has been suggested that if the current pace of EUR depreciation continues, the EUR would hit zero around mid-year.

This is of course highly unlikely and with most analysts forecasting parity in EURUSD being reached by year end we expect declines to moderate.

Keep in mind that Bloomberg data highlights that March and April have been the best two months of the year for the EUR in the past 10 years.

Could seasonality combine with a corrective bounce to take the euro back to higher levels?

Osborne answers:

“Even if EURUSD does rebound near-term, we rather think short-term strength will only give the markets better levels to sell into; ECB QE will drive investors out of low (negative) yielding assets into higher yielding assets and we firmly believe that the Fed can achieve rate lift off later this year.”

The Long-Term USD BullTrend is Only Half Done

TD tell us they are also believers in the long-term secular bull trend story for the USD.

“The assumption of relative growth and monetary policy superiority versus the Eurozone and Japan over the coming years underscores the potential for the USD bull trend to extend in line with its longer-term secular trends - roughly eight years up and eight years down on average since the 1970s,” says a note to clients issued by TD Securities.

We look to be about half-way through the current bull phase.

Forecasting 1.11 as a Possible Target Near-Term

Technical studies suggest the euro to dollar exchange rate could recover to 1.11 and remain in a distinct bear trend.

“Corrective EUR gains in the next few weeks (to the 1.08/1.10 region if that sort of bounce develops) are a sell against 1.11,” says Osborne.