Euro Exchange Rate: EUR-USD Declines as Long-Term Trend Re-Establishes
With the all-powerful dollar rally stalling in March-April, speculators pushed the euro to dollar exchange rate back above the 1.12 level.
“The major risk here is the burst of this EURUSD ‘bubble’ which may happen any time” - Ipek Ozkardeskaya @ London Capital Group.
We have been reporting that the move higher could extend and we saw 1.15 EURUSD heavily favoured by forecasters with an eye on shorter-term timeframes.
How far can the recovery in the euro v dollar exchange rate continue to extend?
In this report, we will consider a number of viewpoints on the matter and note there are a number of sticky levels that could thwart the recovery.
Caution Needed
A string of disappointing US data in April allowed the euro to appreciated as far as EUR/USD 1.1290.
This level was abandoned when the euro v dollar exchange rate rose this high in February.
Many in the market will take note of this previous failure and could well exit the market on caution and stall the rally higher.
Indeed, at the start of the new week we see the euro to dollar exchange rate (EUR-USD) is trading half a percent lower on a day-to-day basis, the exchange rate is at 1.1076 at the time of writing.
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Dollar Looking Stronger
We prefer to observe currencies through three timeframes - near, mid and long-term. The longer-term which encompasses months continues to favour the now well-established USD rally.
The mid-term which covers a matter of weeks has favoured the euro as the USD uptrend stalls.
The near-term however is difficult to call with a fresh bout of USD strength brining into question that afformentioned recovery to 1.15.
"It's a little too early to tell if this is truly the start of a return to the USD bull trend, but in the near term we expect some follow through buying with support still coming from US yields. While we expect a supportive payroll number, a poor release will see the USD and the bond market turn around very quickly," says Lloyds Bank Research noting the decline back to 1.10.
The Mid-Term Forecasts: Can the Euro Continue to Recover?
The case for further gains remains alive and backing the trend will look attractive to many. But there is a major risk.
Ipek Ozkardeskaya, analyst at London Capital Group, has taken a look at the world most traded currency pairing and gives her forecast:
“EURUSD extends gains to 1.1270 in a clear short-term dip-buying pattern.
“As the positive momentum strengthens, the trend followers are increasingly tempted to surf the bull-trend and cash-in rapid short-term profit.
“In fact, given the heavily negative speculative positioning in the market, there is potential for sizeable short-covering and a rebound to 1.1500/50 is not a delusion.”
The recent sell-off in German bunds and the DAX will certainly attract fresh inflows and sustain the single currency.
However, “The major risk here is the burst of this EURUSD ‘bubble’ which may happen any time given that the fundamental direction remains comfortably bearish,” says Ozkardeskaya.
Euro Rally Getting ‘Long in the Tooth’
Many commentators suggest the euro rally is clearly getting long in the tooth and the pair is likely to stall at these levels once all the late dollar longs have been cleared.
Kathy Lien from BK Asset Management notes:
“The move in the EUR/USD is becoming overstretched with the pair nearing its 100-day SMA resistance.”
The Dollar Index is also hovering near support at 94 - this is a significant observation for those who continue to believe the USD side of the GBP-USD equation is the key driver.
The dollar index is a measurement of overall dollar strength - it takes into account a whole host of major USD pairs, eg. GBP-USD, EUR-USD, AUD-USD etc.
So should the entire complex start to stabilise it will become harder for individual currency pairs to continue advancing.
All Eyes on US Non-Farm Payrolls for Near-Term Outlook
The next big driver for the US dollar will be the US Non-Farm Payroll report, due on Friday which will give an indication on how the US employment situation is progressing.
This will be a much-watched event, perhaps attracting more interest than usual with traders wanting to know whether the current slowdown in US data will become an entrenched theme.
Either way, “Friday’s highs should be behind us, barring further disappointments from US data. However, the breach of the resistance at 1.1250 – which in any case was not broken through – is keeping risks skewed to the upside ahead of the Employment Report,” says Asmara Jamaleh at Intesa Sanpaolo in Italy.
If the employment report is worse-than-expected then we see scope for the euro to dollar exchange rate to break higher and test 1.15 EURUSD.
