Euro Exchange Rate: Focus Now Turns to 1.15 for EUR-USD

The euro is strong heading into May thanks to a crash in the price of German bunds and the current bout of US dollar weakness.

“While above 1.0660 the immediate outlook remains bid. Minor support lies at 1.0660 and this guards the 1.0520/1.0457 recent lows.” Commerzbank.

German bund yields crashed lower in the mid-week session as trading desks were forced to dump them at cut prices owing to a lack of demand and plentiful supply.

When bunds fall we tend to see the euro head in the opposite direction, this has certainly helped the euro to dollar exchange rate rally to stronger levels.

Sluggish economic growth from the United States has meanwhile sunk the dollar allowing the euro v dollar rate to break through the 1.10 resistance level.

Analysts are now talking about 1.15 being achievable.

The question on everyone's mind is this - will 1.10 finally break and lead to higher levels for the euro?

For reference, the euro to dollar exchange rate conversion is currently done at 1.1246.

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The Outlook for the EUR v USD: Sell the Rally or Buy the Recovery?

For EUR/USD the early February top at 1.1534 is the next high profile reference on the charts.

The below picture tells the story:

Note how the 100 day moving average, represented by the red line, has been breached.

This has not happened for some time and will serve as an indicator to other buyers in the market that the upside momentum is becoming more entrenched.

How far can the rally go?

"We still believe the gains in the EUR/USD are corrective, but purely technically alone this range breakout can allow for some upside extension. 1.1275-1.1500 is a very strong technical resistance zone to be mindful of in that regard," says a morning forecast note from Lloyds Bank.

We would expect to see the recent bout of weakness come to an end now that the important events that were the release of first quarter US GDP and the US FOMC meeting have passed.

Should May's US economic data come in below expectations then expect the USD to slump further.

US Fed Decision Undermines the Dollar

The big event for the euro dollar rate this week was the April decision of the US Federal Reserve.

The FOMC left itself with plenty of room for manoeuvre as usual with little in the way of certainty coming out of the meeting last night.

The Fed has not explicitly ruled out a June interest rate hike, making the outcome more hawkish than expected.

Still, it has always maintained that any decision on interest rates must be based on data and with recent data coming in consistently divergent with consensus, a June hike is still seen by many as unlikely and this will weigh on the dollar going forward. .

Looking ahead, the longer-term picture remains bullish for the USD, but the soft patch in US economic data readings is taking longer to resolve and some Fed governors see the economy having difficulties achieving what is referred to as escape velocity.

“Therefore, they will wait longer before tightening policy. This is dollar negative. Of course, on the side of the euro, QE will keep rates under downward pressure,” says Piet Lammens at KBC Markets.

At the same time, EMU eco data are improving.

“So, this brings the EUR/USD short term more in balance. Some dollar bulls may still have to reposition and therefore EUR/USD may revisit the 1.1098 area. We see the 1.0462-to 1.1098 range as appropriate short term,” says Lammens.

So while the near-term picture remains supportive of the euro, be aware that these could merely be seen as better levels to bet against the euro on a longer-term basis.