EUR/USD Exchange Rate: Outlook Sees 1.15 Ahead of Range Breakout Towards 1.20

The EUR to USD conversion remains strong and while the 1.1375-1.14 level offers stiff momentum a target at 1.15 now looks achievable.

• Euro to dollar exchange rate momentarily moves above 1.14 before failing
• Traders likely to show caution ahead of key US employment report
• Definitive break above the 1.14s would provide more confidence that the exchange rate was in fact breaking clearly out of the range

The strong upside momentum in EUR/USD drove EUR/USD above 1.14 on the final day of March 2016.

"While it appears that the currency has found some resistance near that level, the main price target to focus on is 1.15," says strategist Kathy Lien at BK Asset Management.

Friday's key non-farm payrolls report will undoubtedly affect the currency pair but unless the U.S. report is very strong (many don't think it will be), "pullbacks in the currency pair should be bought," says Lien.

Other analysts cite the 1.20s as a potential target-zone for any eventual breakout of the multi-month range that has its upper limit at current levels.

Therefore, for confirmation of more euro upside, a clear breakout higher would be required.

What will that breakout look like when it does happen? This is a tricky and key question for those watching EUR/USD.

The Chaikin Money Flow Index (MFI) is often employed by analysts trying to determine the likely direction of a range breakout whilst the range is still going sideways. 

Whilst it has not yet given a bullish signal, it looks like it will probably poke higher to complete a three wave pattern on the weekly chart (see below) which would indicate a strong move higher.

From the point of view of the long-term trend, there is still insufficient evidence yet that the pair has reversed from bear to bull, which means our base case stance remains that the pair will extend further sideways or break lower in line with the dominant down-trend.

As such a break below the 1.04 lows would confirm a move down all the way to parity (1.0000).

The exchange rate is currently in the mid 1.13s as it presses higher following cautious commentary from the head of the Federal Reserve, who suggested US interest rates might stay low for longer than markets had been expecting. Low interest rates cheapen a currency as foreign investors are not as attracted to invest their capital in a low-interest environment, due to lower returns. 

Top of Range Blurred 

Long ranges provide traders with the ideal opportunity to trade the breakout.

However, one problem with this particular range is determining where the top of the range in fact is, and thus when the pair has in fact properly broken out.

Whilst there is a cluster of highs in the 1.13s forming a ceiling, the whole year-long range has another cluster of highs in the upper 1.14s too, which could also be a ceiling.

Indeed, there is even a brief spike high at 1.1713 - so should that constitute the true top of the range?

One way of dealing with the problem of where the range highs are, is to take smaller cautious forecasting steps up to each potential ceiling level.

So for, example, the first step would come from a break clearly above the cluster of highs in the 1.13’s; such a move would be confirmed by a break above 1.1400, with an initial target in amongst the highs in the 1.14s – at 1.1475.

A definitive break above the 1.14s would provide more confidence that the exchange rate was in fact breaking clearly out of the range. Confirmation at that level would come from a break above 1.1550, opening the way to a longer run up to a target at 1.2000.

Finally, an eventual target might be at 1.2200 as this is the minimum target for the range breakout extrapolated using the height of the range as a guide.

This view is similar to that of Robin Wilkins at Lloyds, however, he sees 1.13 as key - expecting a break of that to lead to 1.17.

Further down the line he also envisages a probable rise to 1.20 too:

"Medium/long-term we remain trapped in a range since last March between 1.0450 and 1.1465. We expect this range to remain intact for now, with only a move through 1.1375/1.1465 risking not only a re-test of last August’s spike high to 1.17, but potentially a move towards 1.20-1.23 before the market finds renewed and significant supply."

Lloyds are however inclined to stick with the view that the recent range between 1.1350 to the top and 1.1110 at the bottom will continue to persist.

Possible Triangle Pattern

The chart below shows a triangle pattern possibly forming on the daily chart, as suggested by AFEX’s Lucy Lillicrap, who argues the consolidation is reminiscent of previous similar formations, and could see rates eventually pushing up to 1.20 - a similar call to Wilkins: 

"Putting that into context now would infer EUR/USD tracking back toward 1.2000 even if such a rally proved ultimately corrective," says Lillicrap.

Once complete, triangles lead to breakout moves. Normally they have five constituent waves which are labelled A to E. Once E finishes the triangle usually breaks out either higher or lower. Triangles are normally continuation patterns but they can also reverse trends.

It is possible the triangle may be completing its E wave higher now, as labelled on the chart. Alternatively, it may also be finishing D before moving lower in a final E wave back down to the 1.05 range bottom. There is little to distinguish either outcome.

Unlike the weekly chart where the MFI (the pale blue line indicator shown in the lower pane) looks poised to break higher, on the daily chart the indicator looks poised to move lower, suggesting weakness in the short-term, and potentially argueing for an extension isdeways rather than a break higher near-term.