EUR/USD: We Stick With Our Forecast for a Break Above 1.0985
The euro to dollar exchange rate is still stuck in a falling, sideways channel, after the initial post-ECB spike.
The euro has retaken the 1.09 level largely on the back of weakness in the US dollar complex.
The USD fell against 9 of the G10s on the first day of February while the Dollar Index slipped 0.6% to 99.00, pressured by sell-off from soft US data.
"We expect USD to remain under a bearish bias, sliding lower on dimming outlook on the US macro front that is likely to dampen expectations of further Fed rate hikes," says a note from Hong Leong Bank in Kuala Lumpur.
That said, Hong Leong warn that the Dollar Index may stage a rebound after yesterday’s drop, "but we reckon rebounds to be limited to 99.12 and set sights on it sliding lower to 98.81."
Forecasting Euro Strength, But Just How Much?
Our forecast has not changed - we still see risks biased to the upside given the euro’s new role as international ‘safe-haven’ and risks still tilted to more shocks from the China-Oil complex.
Yes, things have calmed down - and everyone came together at Davos to cheer China on and wave away hard-landing fears as over-exaggerated - however, a fall in the Caixins' could see the spectre of risk-aversion rise up again and this would spell dollar-weakness and EUR/USD upside.
As such Pound Sterling Live sticks to its forecast of a break above the 1.0985 Jan 15 highs leading to a probable move up to the 200-day MA at 1.1050.
This might be followed by a break above the 200-day MA and move up to a possible eventual target at the 61.8% Fibonacci extension of the height of the consolidation at 1.1150.
Such a move might be risky, but could gain confirmation from a 40-point clearance above the 200-day, with a break above 1.1090 likely to lead to a continuation higher.
However, technical analyst Karen Jones at Commerzbank is tilting her bias towards further declines:
"Above the market lies tough resistance at 1.1000/1.1060. These are the recent highs and the 200 day moving average, the 2014-2016 downtrend and 55 week moving average and we view the market as bearish while capped here.
"Our target remains the 1.0523 recent low."
Watch the Stock Markets
From a fundamental perspective we must continue watching global stock markets for indications on risk sentiment.
The euro has benefitted over recent weeks as markets fell into the red confirming the currency benefits from a liquidation of global investments.
In fact, bond yield diffirentials appear to be having a waning impact on the EURUSD at the current time.
"The 2y spread has become less important for EURUSD. It is still about the equity markets, with the beta to the S&P staying very negative. Commodity prices have a positive beta, which is not as large as for equities," says a note from Morgan Stanley Research.
If markets have a risk-off episode this week watch for further euro strength.
