Euro Exchange Rate Forecasts: Will EURUSD Break Above 1.12 or Back to 1.08?

Last Updated: 15 August 2015

The euro to dollar exchange rate (EUR/USD) has found fresh impetus over the past week on observations that the US Fed may delay raising interest rates because of the Chinese currency devaluation move.

The currency pair powered above the 1.11 threshold peaking at 1.1214 confirming our expectations that support at 1.09 would provide the paving for a strong recovery.

For now it seems the currency pairing is considering its next move - above 1.12 or back to familiar sub-1.10 territory:

Where to next though? As can be seen above the prospect of a sustained recovery looks slim with a bias for sideways action looking probable at this stage.

"The USD should generally remain in its corrective ranges into the weekend. While China alleviated some worries on Thursday morning, the market will remain wary of whether further depreciation of the Yuan will be seen. In market terms we would need to see a decline through 1.1060/20 to suggest a near term top is in place and a gradual move back towards the 1.08 range lows. While over we couldn’t rule out a re-test of 1.12 to 1.13 resistance zone," say Lloyds Bank in a note to clients. 

The Head of Market Strategy at Swissquote Bank, Peter Rosenstreich, meanwhile says 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 (21/03/2003 low) and 1.0000 (psychological support). Break to the upside would suggest a test of resistance at 1.1534 (03/02/2015 reaction high),” says Rosenstreich.

The Bigger Picture: Commerzbank Downgrade German Outlook on China Slowdown

Germany is by far the most important economy for the value of the euro, and news that German economic growth could slow catches our attention.

Commerzbank have released a note on the 14th August warning that Germany will not escape the Chinese slowdown.

Risks are limited to an extent for now; but it is argued they are growing.

“Many companies will respond to poorer business conditions in China by reducing domestic investment. In addition, the weaker renminbi is likely to reduce profit margins further. Moreover, in key industries such as engineering or the automotive sector, at least 10% of gross value added depends on final demand from Southeast Asia,” says Dr Jörg Krämer at Commerzbank.

Krämer says the problems in China have for some time led his bank to position for below consensus estimates on growth with a 2016 German growth forecast of 1.8%. “And the downside risks have increased recently, especially for 2016,” says Krämer.

Fundamentals: Greece and China Matter for the Euro / Dollar

From a fundamental perspective it would seem foreign exchange markets are increasingly enslaved to developments in China.

Views are split of whether the Chinese authorities are embarking on a major devaluation, step by step, or are merely liberalising the market.

Reuters hints that even the Chinese authorities are split on the matter.

This story is not yet finished, although the panic has at least eased and the rand’s reactions to the Chinese yuan movements are likely to be smaller.

In Europe, Greece returns to the spotlight in European trading hours as Eurozone Finance Ministers convene to decide on whether to approve a third bailout after the proposals sailed through the Greek parliament ahead of the market open.

It is widely noted that Germany has expressed reservations about the deal that could unlock as much as €86 billion so approval at today’s sit-down would go a long way toward warding off fears that the arrangement may unravel.

"The outcome seems unlikely to drive significant Euro volatility however considering the markets’ relatively sanguine disposition on the entire fiasco. Indeed, Greek 10-year bond yields have dropped to the lowest level since early March, pointing to ebbing credit risk and signaling investors are willing to continue giving Athens and its creditors the benefit of the doubt," says Ilya Spivak, Currency Strategist with FXCM.

Spivak notes that the threat of contagion to other Eurozone economies is greatly reduced as debt is largely held by EU institutions and the IMF - private investors This seems to make sense. The lion’s share of Greek debt is held by EU institutions and the IMF rather than the private markets.

"This effectively cuts off contagion risk in a worst-case default scenario. While an exit from the Euro area would almost certainly unnerve investors if only because it would be unprecedented, the probability of such a turn of events seems distant enough to discount (at least for now)," says Spivak.