Euro / Dollar Exchange Rate to Continue Sideways Grind say Forecasts

The euro dollar exchange rate is unlikely to break out of its side-ways moving trend, however the near-term outlook suggests a move to the lower end of the range is most likely.

To the topside we see the euro dollar rate (EURUSD) capped by 1.15, not only is this a formidable psychological resistance zone but it could also well be an area that the European Central Bank (ECB) steps into the market and defends the exchange rate via bond purchases.

To the downside we are currently seeing selling pressure dry up in the 1.10’s, that said a longer-term sideways move is defined by a low points at 1.04, this was last reached in April and would require an improvement in US data to achieve once more.

April's FOMC minutes, released on the 20th, took June off the table as the first rate hike as recent data continues to disappoint. “So with positioning more neutral now in the USD, and prices back towards mid-ranges, we are likely to see the USD lurch around on each piece of data. Our overall bias is still towards underlying USD strength, but we clearly risk being trapped in a range if the data remains neutral,” say Lloyds Bank Research.

The FOMC minutes indicated a low likelihood of a June interest rate hike, as “many” participants thought it unlikely that the data available by the June meeting would justify a hike. The minutes also showed there was deliberation as to whether the Q1 slowdown in growth was temporary or symptomatic of a longer-lasting loss of momentum for the economy.

Those hoping for a sudden return to dollar strength will have to continue being patient. EUR/USD is consolidating around 1.1131 and traders will be watching support at 1.1066

“In the longer term, the symmetrical triangle from 2010-2014 favours further weakness towards parity. As a result, we view the recent sideways moves as a pause in an underlying declining trend. Key supports can be found at 1.0504 and 1.0000 (psychological support). Break to the upside would suggest a test of resistance at 1.1534,” says Yann Quelenn, market strategist with Swissquote Bank.

Optimistic on Dollar’s Prospects

We agree with those analysts who are happy to maintain a cautiously positive bias on the dollar longer term. Earlier this week, the comments from ECB’s Coeure were euro negative, triggering a setback in EUR/USD, while US data were USD supportive too.

“This helped the recent bottoming out process of the USD. At the same time, interest rate differentials moved again in favour of the dollar. So, the short-term picture looks more USD constructive,” notes analyst Piet Lammens of KBC in Belgium.

The eurozone bond sell-off has been an important driver for currency trading of late. The rise in core bond yields supported the euro more than the dollar. “There are tentative signs that this pattern is changing. If the decline of the Bund stalls, the euro rally could peter out too,” notes Lammens.

While patience appears to the key word when approaching the euro dollar we do see some clearly delineated trading zones. A stop loss above 1.15 will certainly provide confidence to those looking to bet on further declines. Even a move to the bottom end of the range at 1.04 offers decent reward.