Will the Euro Exchange Rate's Strength Last?

Markets have become increasingly positive on the euro with analysts forecasting further gains in the near- to medium-term.

As we head into the weekend the shared currency has stabilised at lower levels following some better-than-expected NFP data.

"The euro moved a little further below recent 10-week highs against the dollar in pre-payrolls trade. The euro also took a nosedive from the prior day’s three-month high against the pound which rallied in the wake of a surprisingly quick win for Conservatives whose vote tally was enough for a narrow majority in the U.K. parliament," notes Joe Manimbo at Western Union.

While the longer-term picture continues to signal a potential fall to parity with the dollar, analysts see the potential for further gains to 1.15 in the nearer term.

Form is currently on the European currency's side; the euro dollar exchange rate has rallied from 1.0520 in April to achieve a best of 1.1343 in April.

The euro pound exchange rate has meanwhile bounced from 0.7185 in April to a best of 0.7483 in May.

Volatility in the DAX and Bunds - Could Continue to Aid EUR

The problem for those looking to trade the euro and make euro-based international payments at the present time rests with the volatility in German financial markets.

The decline in German bond yields has been sharp and when German bond yields rise so does the euro.

The bond rally reversed on Thursday allowing the DAX to rally and the euro to slump (we have seen how this relationship works before).

“At this point the German index is so erratic it is hard to rationalise its actions. Even disregarding the bond bonanza earlier in the day, the DAX is flipping between hundreds of points in losses and gains each day,” notes Connor Campbell at Spreader.

Expect more of the same in the near-term, we see the DAX-Bund show as being ultimately pro-EUR.

Greek Situation Improves… Very Gradually

Meanwhile, the politically inspired risk that has kept the euro complex under pressure for some time appears to be waning and should aid the shared currency.

It appears that there are signs of conciliation on both sides as there are reports of solid lines of communication between Chancellor Merkel and Greek PM Tsipras.

While Merkel appears ready to sanction additional funds, Tsipras has signalled that he is not prepared to give in on one of his policy red-lines, namely pensions reform.

Nevertheless, currency commentators have noted that there are reports that sufficient funds are available to meet the €774m payment to the IMF on the 12th.

“The ECB has expanded Greek bank ELA funding by a further €2bn to €79bn, which suggests that the Bank is not signalling any loss of confidence as regards Greece, for now at least,” says Jeremy Stretch at CIBC.

Forecasting Euro Strength to Continue Near-Term

Cut away the ups and downs that we are seeing and look at the bigger picture.

We have three time frames, short-term = a matter of days. Mid-term = a matter of weeks. Long-term = a matter of months.

The longer-term forecasts confirm the euro will eventually succumb to pressure as the ECB maintains a path of quantitative easing while the Bank of England and US Federal Reserve raise rates.

But, the shorter- and nearer-term prospects are more constructive.

“Evidence of a continued reduction of near-term political risk, allied to the uptick in inflation expectations and resilience in Eurozone peripheral data, suggests the EUR short squeeze could extend towards the 1.1445/50 levels last seen in mid-February,” says Stretch.

Staying Negative Long-Term

On the long-term, we get the sense that traders continue to stand behind the dollar - "we expect the US economy to accelerate significantly in Q3, pushing the greenback higher," says a weekly currency forecast note from Swissquote Bank in Switzerland.

Despite the weak growth other data indicates underlying strong activity.

US data will be continue to be closely monitored in the coming weeks and traders will be eager to buy dollar as soon as a good news will be released.

"We believe that EUR/USD correction is coming to an end and that the euro will need a real bad news from the US to break the strong 1.1389 resistance. If the single currency loses momentum, a support lies at 1.1029 (previous resistance, now support) and 1.0458 further," say Swissquote.