Euro / Dollar Exchange Rate Breaks 1.10, New Range Now 1.1050 - 1.1215
The euro exchange rate complex has moved higher after EURUSD finally broke out of its long-term sideways trend. We now see higher levels due to a number of compelling reasons.
The euro to dollar exchange rate has moved higher and is back above 1.10 in mid-week trade. The move takes the exchange rate out of the incredibly reliable sideways trend defined by 1.10 on the upside and 1.08 to the bottom.
From a technical perspective this is an undoubtedly positive move for the shared currency as it clears out the barrage of sell orders placed just above 1.10 by currency speculators.
With these orders out the way the downside forces posed by the speculative markets are removed.
As an example of how the speculative markets have been cleared out we can report that BNP Paribas have been stopped out of its EUR/USD Short entered at 1.083, their stop-loss was set around 1.1005.
Deutsche Bank has been stopped out of its EUR/USD short from 1.082 at their stop-loss placed around 1.11.
JPMorgan were stopped out of their EUR/USD Short from 1.0923 at a stop-loss set around 1.113.
So where does the euro move next? At the very least the moves higher force open a wider range for the currency pair.
"The resistances around 1.1050 (December highs and 200D MAV) were overshot in response to falling rate hike speculation in the US. What is noticeable from a longer-term perspective is that the euro has been hovering between 1.05 and 1.15 for a year," says Ralf Umlauf at Helaba Bank in Germany.
A recovery within this range cannot be ruled out as technical indicators are supportive now argues Umlauf whose favoured trading range now shifts up to 1.1050 - 1.1215.
ING: Break-Out to the Upside
Not all instituions were betting on a return to business-as-usual though. Chris Turner at ING in London observed earlier in the week that money market rates are falling around the world, including in the Eurozone where the 12m EONIA forward has edged down to a new low at -0.45%.
Normally this would be negative for the EUR, but the issue is that rates are falling everywhere.
"We doubt services data in the Eurozone is going to have much impact on the EUR today, but do note that EUR/USD looks poised for a break-out from narrow ranges – e.g. a break out of the 20 day Bollinger Band (1.0814-1.0955) could see some strong follow-through. As it stands right now, we see greater risk to the upside than the downside," says Turner.
Eurozone Economy Improving
Better-than-expected unemployment data from the eurozone this week came as a breath of fresh air for European Central Bank policy makers.
Data showed another reduction in unemployment levels to 10.4% for December, the lowest level since September 2011.
This is just the latest development in the Eurozone economy which continues to improve, and at current rates of improvement, the ECB may not have cut rates any further.
US Economy Slowing Confirms PMI Series
Any move higher in the euro to dollar exchange rate will however be a function of US dollar weakness as opposed to euro strength in our opinion.
Mid-week data has not been kind to the US dollar. ISM Non-Manufacturing PMI data read at 53.5, below the 55.1 forecast, sparking another bout of USD selling.
The non-manufacturing data follows a weak set of manufacturing data out of the US which was released on the 1st of February. This sparked some aggressive USD selling, confirming markets are starting to buy into the lower USD story.
Manufacturing contracted in January as the PMI® registered 48.2 percent, an increase of 0.2 percentage point from the seasonally adjusted December reading of 48 percent, indicating contraction in manufacturing for the fourth consecutive month.
A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
This is hitting expectations for future interest rate moves at the US Federal Reserve.
“Interest rate speculation in the US is declining and a hike in March has been more or less priced out. This is in response to comments from various Fed officials, who have drawn attention to the fact that the global economic risks and turmoil on the financial markets have to be taken into account. The pace of rate hikes could slow a little, according to the officials,” says Helaba's Umlauf.
US economic growth has been slowing over the past couple of quarters. Indeed, the economy seems to be in a soft patch.
The advance estimate of Q4 GDP came in at 0.7%. Most major components were weak, particularly the contribution of fixed investment continued to decline.
“On top of this the sharp drop of December’s orders and shipments of durable goods suggest that this weakness could continue in the coming months, as a result of the collapse in oil prices and the stronger US dollar,” says Maritza Cabezas Senior Economist at ABN Amro.
ABN Amro say they see some downside risks to their Q1 GDP growth forecasts.
“We think that the low oil prices at the beginning of this year and the instability in financial markets, which resulted in a sell-off in the US equity market will impact financial conditions in the US,” says Cabezas.
If oil prices remain low and the US dollar continues to appreciate at a similar pace as in 2015, this could put further downward pressure on manufacturing and energy related activities.
Could HSBC Right in Calling Euro Dollar at 1.20?
We reported last year that HSBC were forecasting 2016 to be a softer year for the US dollar based on the potential for a shift in tone on US interest rate rises.
“If at any time next year the market thinks the Fed may need to loosen in 2017, then the USD will plummet," HSBC’s David Bloom wrote, "the risk/reward in 2016 is for a weaker USD. Fed rate hikes are in the price.”
The forecast was an outlier as many institutional forecasters were calling the US dollar higher and for the euro to dollar conversion to slump to parity.
If HSBC are right then we could well see a higher euro to dollar rate, the bank are forecasting 1.20 for the year end.