SEB and Goldman Sachs See Euro Exchange Rate's Strength as Fleeting

The euro has recovered this week against both the pound and US dollar but strategists still prefer selling into strength.

Eurozone PMIs for November, released at the start of the month, point to a further acceleration in the pace of growth, putting the region on track to deliver its best quarterly performances in four-and-half years.

Further buying interest in the euro was sparked on news that confidence in Germany has improved again with the Ifo Institute's business climate index hitting its highest level since June.

Despite the improved growth profile we don't expect a change of tone from the European Central Bank (ECB) where comments are, and expected to remain, dovish.

Due to sluggish inflation and unfriendly global headwinds the ECB is fully expected to further its quantitative easing (QE) measures and now, possibly cut deposit rates. Expect this theme to continue being the over-riding force pressing down on the shared currency as we move into December.

European PMI Figures Give Euro Exchange Rates a Boost

The euro complex has found support on the back of some better-than-expected PMI figures.

Markit Composite PMI read at 54.4, analysts had expected a figure at 53.9.

"Both employment and new orders indicators signal significant improvements, hitting a 54-month high. At face value, the November PMIs are consistent with eurozone GDP growth at 2% in annualized terms – fully consistent with our 4Q15 forecast. Although the external environment is getting increasingly challenging, the recovery in the eurozone continues to benefit from a solid domestic demand, the lagged-boost from past EUR depreciations and the good performance of traditional export markets," says Edoardo Campanella at UniCredit Research in Milan.

This may provide some immediate support for the EUR, leading to short-covering following net speculative bets against the EUR, which has hit the highest five-month level.

Hawkish FOMC Sentiments Keep USD On High

Across the Atlantic, the USD has benefitted from high anticipation of a December interest rate lift off.

Sheer expectation and hawkish comments from FOMC officials have driven the USD up, as much as it has driven the EUR down to a six-month low.

Of course, strong US economic data is a solid factor. October saw an impressive number of jobs added and the employment rate dipped to 5.0%.

A previously unscheduled and expedited FOMC meeting is scheduled for today. The agenda is “review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks.”

Of course, we will be awaiting any announcements of the matters discussed.

1.04/05 Targeted by SEB Bank

On the EUR front, it is quite difficult to get a positive shift in sentiment or, as mentioned above, even a fleeting one.

Come December, the expected monetary policy divergence of the EU and US central banks has almost cemented the EUR/USD fate.

Presently, the EUR/USD exchange rate is in the region of 1.0640.

SEB Bank is homing in on the 1.04/05 target, "The pair ended last week with a steep decline, which was confirmed by the break of 1.0667.

"A fresh trend low has thereafter been set and some further losses towards 1.0580/70 should also be pencilled in before another minor correction probably will be due.

"Thereafter the final step down into the broader 1.0481/1.0405 support cluster, the ideal target for the current wave three, will be met."

According to SEB Bank, resistance can be found at 1.0624, 1.0651, 1.0690, and 1.0763.

Support at 1.0600, 1.0580, 1.0481, and 1.0457.

Goldman Sachs See Resistance at 1.0680

There are growing concerns that the market may be a little over-agressive on their positioning against the euro.

"The market seemed to view the lack of immediate downside after the very dovish comments by Draghi on Friday as a warning of an imminent squeeze and we saw leverage players reducing shorts," say Goldman Sachs, in a spot strategy note to clients.

Now the market is feeling a touch under positioned into the ECB and it feels as though the currency is more likely to drift lower.

"Bias is for a core short and only looking to fade rallies rather than add on new lows. Key levels: support at 1.0500 with the resistance at 1.0680," say Goldman Sachs.