EUR/USD Exchange Rate Forecast to Remain Supported, Commerzbank See Risks of ECB Action
- Written by: Gary Howes
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Despite the euro exchange rate complex falling across the board analysts continue to warn declines should be shallow until the European Central Bank delivers a game-changing turnaround in strategy.
EURUSD is selling off sharply from resistance around 1.15 on technical selling and risk avoidance ahead of Thursday's European Central Bank meeting on the fear that Mario Draghi could say or do something that would be consistent with easier monetary policy.
Expect losses to be shallow though.
"As long as there are no clear signs of interest rate hikes in the USA, the euro is unlikely to depreciate at a greater pace against the US dollar," says Esther Reichelt at Commerzbank.
Since May, the EUR-USD rate has essentially been hovering in the range of 1.08 to 1.15.
The currency pair is now testing the upper end of this comfort zone:
After mixed US data and surprisingly dovish comments by Fed board members Lael Brainard and Daniel Tarullo, the FX market last week priced out a first rate hike by the Fed in December and pushed up EUR-USD rate.
Rate hike expectations will continue to dominate the USD outlook and until we get a firmer sense that rate hikes will occur in coming months we would expect limited upside traction for the dollar.
ECB Dominates the Outlook for the Euro This Week
Commerzbank Research’s expected trading ranges for the week ahead:
- EUR-USD 1.1150-1.1600
- EUR-GBP 0.7250-0.7500
- EUR-JPY 133.00-138.00
- GBP-USD 1.5250-1.5650
- USD-JPY 117.50-121.50
- EUR-CHF 1.0700-1.1000
The FX market is focused on the ECB meeting next Thursday.
Last Thursday, ECB governing council member Ewald Nowotny prompted euro losses with comments that the ECB is clearly short of its inflation target and the use of further instruments was necessary.
"While we do not expect the ECB to increase its asset purchase programme at the meeting next Thursday, it will probably emphasise its readiness to take further steps. Indeed, it has little interest in a firmer euro; after all, a stronger euro raises deflation risks," say Commerzbank.
And from an economic perspective too, a stronger euro is not desirable.
That said, we will probably have to wait a while for much lower EUR-USD rates.
Even if we are convinced that the ECB will increase its asset purchase programme, the scale of adjustment remains open.
"But this will ultimately determine the effect on exchange rates. As long as there are no clear signs on the other side of the Atlantic of an imminent rate hike by the Fed, the lower end of the EUR-USD range also remains limited. Consequently, next week should bring only marginally lower EUR-USD rates," say Commerzbank.
"Traders may find that the next few days for EUR/USD (and the Euro more broadly) may be more frustrating that what's transpired the past month. Since the September FOMC meeting, many EUR-crosses have started to price in the increasing probability that the ECB will have to enhance its current QE program or unveil new easing measures altogether."
Reflexively, any prolonged period of EUR/USD strength going forward probably raises the probability that the ECB will ease in the coming months, as a stronger trade-weighted Euro will only hurt exporters and dampen inflation.
The CFTC’s most recent COT report showed that speculators held 80.6K net-short contracts at the end of the week of October 13, 2015, meaning there is some more room for positioning to build if the ECB signals its intention to ease in the future.
Positioning is not in the way of a further short build-up: traders were much more short in August (115.2K contracts) and in March (226.6K contracts).
"Traders may find that the next few days for EUR/USD (and the Euro more broadly) may be more frustrating that what's transpired the past month. Since the September FOMC meeting, many EUR-crosses have started to price in the increasing probability that the ECB will have to enhance its current QE program or unveil new easing measures altogether," says Christopher Vecchio, Currency Analyst, at DailyFX.
Christopher Vecchio, Currency Analyst, at DailyFX
