EUR/USD to Maintain Strength in Coming Days

Forecasts confirm that the euro to dollar exchange rate should maintain an upside bias in the near-term.

The euro exchange rate complex is pushing higher once more having found support in mid-week extend into a profitable trade for those brave enough to back the shared currency.

It would seem that much of the new-found strength in the EURGBP and EURUSD exchange rates stems from weakness in the pound and dollar.

Despite the failings of the USD over recent weeks it is worth pointing out that the EURUSD has been trending higher since July 2015, bringing into question those fundamental forecasts that were seen pricing a fall to parity in 2015.

The euro is in a medium-term uptrend, while the longer-term picture confirms sideways action is preferred:

"Even though most factors speaks in favour of a bear flag being under construction since Sept 22 the short term charts speaks of more near term upside risk," says a note from S.E.B bank in Sweden.

"A move above 1.1273 will trigger an hourly buy signal calling for a test of the flag’s upper boundary, 1.1340-ish (and then turning for a downside test). To avoid the above scenario prices must fall back below 1.1211,” say S.E.B.

We believe EURUSD resistance at 1.1340 is important and a break here will expose the pair further near-term gains.

Yann Quelenn, a Market Strategist with Swissquote Bank says EUR/USD has moved sharply higher and is now targeting hourly resistance at 1.1330 (21/09/2015 high).

“Support can be found at 1.1087 (03/09/2015 low). Stronger support lies at 1.1017 (18/08/2015 low).

“In the longer term, the symmetrical triangle from 2010-2014 favored 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). We remain in a downside momentum.”

Meanwhile, Shaun Osborne at Canada’s Scotiabank says he favours selling the euro on any strength noting the EURUSD has traded to – or a little above – the upper end of the recent trading range of 1.11/1.13 even though the news flow over the past 12 hours has hardly been constructive for Europe.

Deutsche Bank’s large reported loss and the significantly larger than expected decline in German exports in August.

This was the biggest drop in exports since 2009 and supports other data from the industrial sector (output and orders) which imply Europe’s export engine is not firing on all cylinders.

“We think the EUR bounce reflects short - covering on global growth concerns rather than a strong view on the near-term direction. We continue to favour fading EURUSD gains and lo ok for a return to the 1.11 area,” says Osborne.

Euro Resilience Unlikely to Last

The trend of recent German macro-economic data has been far from positive.

After weak factory orders and industrial production we have seen negative tendencies extend with the German trade surplus coming in well below expectations, this comes as exports registered their worst monthly performance, down 5.2%, since January ’09.

“Yet despite the data and ongoing negative news-flow from corporate bell weathers VW and Deutsche Bank the EUR is proving well supported, largely due to corporate and macro-demand,” says analyst Jeremy Stretch at CIBC.

However, unless we see EUR USD punctures post US NFP highs at 1.1319 CIBC remain biased towards a lower EUR, not least should the ECB minutes underline that ECB policy remains biased towards additional stimulus.

UniCredit Lower Euro Forecasts

UniCredit Bank have told clients that they have lowered their euro forecasts in anticipation of additional ECB stimulus in the pipeline.

Analysts "now see EUR-USD at around 1.11 by end-2015 and at 1.16 by end-2016. However, the eventual upward trajectory remains intact, as more easing should only offset some of the fundamental forces that remain supportive of the exchange rate."

For next week, one thing to watch is the changing correlations between EUR-USD and risk, which have been falling rapidly, suggesting that the negative relationship is fading.

In the UK, we expect some modest sterling appreciation, as pay growth will likely accelerate, although risks for some noisy price action in GBP have increased. 

The Week Ahead: What to Watch

EUR/USD will also be on the move but it will most likely trade on the market's appetite for U.S. dollars because the German ZEW survey is the only piece of market moving EZ data on the calendar. 

"The currency pair is trading near the top of its 5 month long range (barring the short-lived spike in August) and while investors are shunning the U.S. dollar we believe they there is a lot more to be worried about in Europe," says Kathy LIen, Managing Director at BK Asset Management. 

Lien notes that German data has disappointed in a very big way and between VW's problems and downside data surprises, the ZEW survey is likely to show less investor optimism.