EUR/USD Rate Struggles to Break Above 2014-2015 Downtrend

Latest news and predictions for the euro to dollar conversion pairing show there is a clearly defined limit to the EUR’s strength which will be seen by some as an opportunity to profit.

The moves seen in the euro to dollar (EURUSD) pairing have been eye-opening lately with the pair jumping from 1.11 to above 1.13 on the 8th of June in what is a massive move for the world’s most liquid financial market.

On Wednesday the 10th the pair is still hovering at these levels suggesting upside momentum may have stalled for now.

The failure of the pair to advance beyond this point is no coincidence as 1.1350 is where the 2014-2015 downtrend lies:

According to Karen Jones, a technical strategist with Commerzbank, traders will be looking to load up on sell positions based on the information supplied by the above daily chart:

"EUR/USD has again rallied to and held below the 2014-2015 downtrend at 1.1353/61 currently. The risk/reward here remains to go short, looking for a slide back to the 1.0845/19 region. Loss of 1.1052 should be enough to trigger a slide lower.

"Should a close above 1.1353/80 downtrend and recent high be seen, we would allow for a further attempt on the topside towards the 1.1468 May high and 1.1534, the February high."

However, a sudden return to USD strength could be delayed as it would seem that one of the main drivers of the euro dollar rate is the looming FOMC decision due on the 17 June, with expectations for the Fed not to hike rates at this meeting the dollar remains essentially unsupported.

The lack of enthusiasm for the dollar sees currency markets exposed to moves in Eurozone bond markets – the recent surge in bond yields has allowed the euro to gain. As a rule of thumb, rising bond yields = a rising currency.

There were further pro-EUR developments with comments from ECB member Nowotny saying the downturn in the Eurozone is over and Noyer suggesting a Greek exit would not cause instability for the Eurozone.

At the time of writing the euro to dollar conversion rate is at 1.1240 on the inter-bank wholesale market. High street banks are seen offering the rate in the region of 1.0799 while leading independent international payment providers are delivering closer to the market around 1.1161.

A Significant Stumbling Block or Boon for the Euro?

Fundamentally, many traders will show caution on EUR/USD over Greek uncertainties. Talks resumed at the start of the week, but no details have been disclosed despite lingering uncertainty.

“This does not rule out the possibility of a sharp rise in case of a positive resolution of the crisis, but this should not alter the underlying trend of the exchange rate, which will continue to be conditioned mostly by developments on the Fed’s side,” says Asmara Jamaleh, Economist with bank Intesa Sanpaolo.

The technical barrier presented by 1.14 remains a significant stumbling block to the euro’s advances and we are confident that strength will run into a barrier at this point.

“Indeed, the pair remains oriented downward as long as there is no settled deal between Greece and its creditors. Furthermore, any new positive information on that topic will give temporary upside pressure to the currency. We consider that it will be a good entry point to reload short EUR/USD positions against a backdrop of US recovery,” says Yann Quelenn, an analyst at Swissquote Bank.

Jamaleh believes that in the immediate term, EURUSD could match last week’s highs (1.1380) if US data prove disappointing, or euro area data (French and Italian industrial output tomorrow and aggregate industrial output on Friday) surprise on the upside, but mid-May highs should not be exceeded (EUR/USD 1.1467).

Don’t Forget the pro-USD Trend

While we continue to fuss on the day-to-day moves of the euro to dollar exchange rate it must be noted that longer-term views continue to favour weakness.

“Since the beginning of the year, the dollar is up more than 7% versus the euro and over 6% against the Australian and Canadian dollars.  Even though it gave up part of its gains today, the uptrend in the greenback remains intact,” Kathy Lien at BK Asset Management reminds us.

There have been many false starts with regards to the resumption of the euro’s downward trend against the dollar with declines being aggressively reversed over the past 2 months.

That said, we reported back in April that the next bull phase of the long-term dollar rally could only resume in September.

If this increasingly plausible scenario proves correct we could be in for a continuation of the range trade between 1.10 and 1.14.