Euro Forecast: EUR/USD at 1.05 After Correction Runs its Course
The euro exchange rate complex has corrected higher but any upticks in the EURUSD will continue to be sold.
The EUR has taken its chance to recover some lost ground agianst the US dollar following the release of the October FOMC Meeting Minutes.
The minutes show members of the US Federal Reserve are still divided on the prospect of raising interest rates in December. Traders have taken this as a chance to book profit on what has become a profitable trade.
The USD converted against the EUR at a seven-month high ahead of the release of the minutes.
Currently the EUR/USD exchange rate is 1.0687, just above the key threshold of 1.0660. As we can see while a corrective move is possible the channel is pointed lower and we will need to see some sustained stabilisation before calling the floor:
EU and US Policy Divergence Continue to Weaken EUR/USD
Downside risks continue to prevail against the pair with the euro exchange rate complex being under pressure across the board. The lacklustre economic growth of the EU have increased expectations for new stimulus measures at the central bank’s meeting on December 3.
Conversely, the USD has kept on strengthening on the back of a highly expected rate hike at the Federal Reserve due to strong economic data, including positive inflation data. CPI rose to 0.2% in October.
With this in mind, ING expects, “EUR/USD to remain soft with a bias for a continued drift to the 1.0500 area.
“With the EUR so soft, we imagine that the CNB and also perhaps the SNB is intervening to buy EUR to protect the 27.00 and 1.0800 levels respectively. Expect pricing for negative rates to continue to build.”
Possible Concerns For The Popular EUR/USD 'Short' Trade
However, there are concerns for the short EUR/USD strategy.
On both sides of the currency pair we are getting signs of over-extension.
Currently, the market is pricing more than a 10pb cut in the deposit rate for December 3, stacking the odds against the ECB to over-deliver.
"The current situation, as well as the outlook for the eurozone, is not as alarming as it was a year ago. This suggests that the ECB can afford to wait on the outcome from the Fed’s meeting on December 16," says a note from Handelsbanken Capital Markets.
Handelsbanken do note however that not delivering anything to the market will result in harsh price action after the large decrease in the EUR since the October meeting. They may have to cut simply to avoid burning the financial markets!
Additionally, if the Fed's December rate rise is not set in stone, as the Minutes release confirms. The current wave of USD bullishness could quickly retreat. For this reason there is a risk that parity in EUR/USD may still be further away then it seems.
Swissquote: EUR/USD pair is now consolidating, Lines To Watch
“EUR/USD is still in a downside momentum but is now consolidating. Yet, the technical structure is clearly negative,” strategist Yann Quelann at Swissquote Bank in Gland Switzerland says.
“The pair lies above 1.0600. Hourly resistance can be found at 1.0897. Stronger resistance stands at 1.1095. Expect further consolidation of the pair.”
As long as EUR/USD resistance levels hold, Swissquote strategists are of the view the pair’s technical structure favours a bearish bias.
Swissquote’s long-term bias: “Key resistance is located region at 1.1453 and 1.1640 is likely to cap any price appreciation. The current technical deteriorations favour a gradual decline towards the support at 1.0504.”
Goldman Sachs meanwhile say they are content to sell any rises and are looking to target the 1.05 area:
"The pair is reaching new fresh lows in the 1.0631 area. We like it lower with a bias to sell on rallies towards 1.0690. We stick with our 1.05 pre ECB target and have key levels for the session as follows: Support is at 1.0550/20 with the resistance at 1.0760."
