Euro Exchange Rates Looking Fragile as Bund Yield Support Declines

The euro has fallen against both the US dollar and pound as support from Eurozone sovereign bond yields wanes.

EURUSD: “The near term risk still remains for failure and a slide to the 1.1052 pivot then the 1.0845/19."

EURGBP: "Failure here should see a slide back to the 55 day ma at 0.7243."

A leading financial market analyst at Westpac Bank has confirmed that the strength Eurozone bond yields have offered the euro over May and June may now be ending.

Germany's bund yields are of particular importance - with bunds having peaked for now we are seeing more analyst forecasts of near-term euro weakness.

At the time of writing the euro continnues to lose value against both sterling and the dollar with the EUR/USD down at 1.1226 from its 1.1350 highs - a fall to 1.10 could now occur (see forecast note below).

The EUR/GBP exchange rate is meanwhile seen lower by a further 0.17% from Thursday's soft close having reached 0.7242. We note the average high street bank is offering the pair at 0.6958 while independent providers are coming in some 5% better around 0.7191.

Support for the Euro Forecast to Wane

“The rise in bund yields has arguably been the key catalyst behind EUR’s near complete reversal of its 2015 year to date losses on a bunch of key crosses,” notes analyst Richard Franulovich at Westpac Bank in Australia.

The analyst notes that EUR’s correlation with bund yields has waned in recent sessions but the rise in bund yields has nevertheless been an important support for the currency lately, “conferring a degree of immunity at a time when some marquee US data points have given a strong jolt to confidence in US growth prospects and September FOMC tightening expectations,” says Franulovich.

Westpac research report that historical analogs show that the bulk of the bund sell off is now behind us as has the “rise in EUR on a bunch of crosses.”(As bund prices fall, their yields rise - always pay attention to whether yields or prices are being reffered to).

Nevertheless, it is worth pointing out that any reversal in yields is unlikely to be as drastic as was the case at the start of 2015 and some stability should come into the market.

Analyst Joe Manimbo at Western Union suggests that base on this losses in the euro could also be relatively shallow:

"The euro was in a giving mood as the week’s first meaningful look at the world’s largest economy enticed many to cash in on the single currency’s recent out-performance. The euro has found a floor in rising European bond yields but it remains a wobbly one given that Greece had yet to clinch a deal with its creditors for more default-averting cash."

This brings us on nicely to Greece - this is the one major unknown in the equation and a resolution to the crisis could support the Euro.

Ultimately though Greece is a minor Eurozone economy and the focus should remain on Germany and the price of bunds.

Forecast for the Euro to Dollar Exchange Rate

Where will the euro head next against the dollar now that the support bund yields provide is on the decrease?

We hear from technical analyst Karen Jones at Commerzbank on the matter:

“The near term risk still remains for failure and a slide to the 1.1052 pivot then the 1.0845/19. Should a close above 1.1380/87 the 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.

“A close below 1.0819 (will trigger losses to the 1.0673/78.6% retracement and then the 1.0520/1.0457 30 year uptrend and recent low.”

Forecast for the Euro to Pound Sterling Exchange Rate

The euro has meanwhile hit a limit against the UK currency.

Commerzbank's Jones notes:

“EUR/GBP has again tested and has now failed at the 78.6% retracement at .7391. Failure here should see a slide back to the 55 day ma at 0.7243, which we suspect will hold for now. Below here will target 0.7127/23 (Fibo + 22nd April low).

“Resistance at 0.7391 is regarded as the last defence for the 0.7482 May peak.”

Commerzbank say they will neutralise their outlook for now as the move feels somewhat directional.

We see this sideways trend as being an opportunity in itself - if we know where the limits are we can trade the move in between.

"Above 0.7482 will introduce potential to the 0.7685/94, the 38.2% retracement of the move down from 2013 and the 55 week moving average," says Jones.