EUR/USD Exchange Rate: CitiFX Forecasts Eye 1.0450
The euro exchange rate complex is seen consolidating strengthen in the near-term but coming days could see the US dollar advance once more.
The euro is managing to hold ground above the 1.07 level against the US dollar confirming this zone as an important support level that must break ahead of any sustained run further south.
Most analysts we have heard from confirm that the eventual breakdown in the EURUSD is likely - present resillience by the EUR merely masks the underlying picture which favours the dollar against the euro.
"EURUSD’s rebound from below 1.07 this week appears to be related to position-adjustment more than a fundamental change in views on the EUR or USD outlook and gains are putting even greater distance between spot and our estimated equilibrium spot rate of around 1.01," notes Shaun Osborne, FX analyst with Scotiabank.
US rates markets currently see a 66% chance of December interest rate rise at the US Federal Reserve and traders are buying dollars as a result.
The risk to this directional move in the dollar is obvious - if the Fed opts to leave rates unchanged in December we could see a rapid decline in the dollar and a recovery in the EUR/USD exchange rate.
On the other hand, markets are discounting only 1 further 25bp hike in 2016 – the risk / reward favours further rises in US rates especially if US data continues to improve.
If this is the case then we could expect the dollar to add to its recent gains and push the euro towards parity as markets race to catch up with the strength of the US economy.
In all, CitiFX see a better risk/reward scenario in chasing the euro lower and the dollar higher though.
CitiFX have studied currency flows and confirmed that we are now in the fourth week of strong USD buying by hedge funds and leveraged funds.
"Real money has been absent but is likely to step up as more US data encourages US short rates to rise further," say CitiFX.
Therefore it is believed that buying interest in the dollar remains strong, and will do so for some time.
"Upside targets in USDJPY are seen towards 125.50 – 80 with 122.00 as support and 1.0450 – 1.0500 in EURUSD with 1.1000 – 11 seen capping gains with only China standing in the way," say CitiFX.
For now though the euro to dollar exchange rate could trend around current levels.
The EUR was partially lifted after the ECB’s Coeure was cited as saying that “the debate is still open” with respect to prospects for further QE at next month’s ECB Council meeting.
"For today, look to Draghi’s testimony to the European Parliament for domestic cues with further (we think top heavy) consolidation expected around the 1.0700-1.0800 neighbourhood with the policy divergence dynamic still in play," says CIBC’s Emmanuel Ng.
