Euro / Dollar Rate to Recover This Week: UniCredit

The euro to dollar exchange rate is forecast to recover over the course of coming days as it is too soon to call the start of the dollar rally argues a leading foreign exchange analyst we follow.

Roberto Mialich, FX Strategist at UniCredit Bank in Milan says a cautious US Federal Reserve and soft US data will likely continue to weigh on the USD going forward.

The call comes following a flash of strength by the dollar which has forced the euro to dollar exchange rate lower from its 1.14 April highs towards 1.13 again.

But, don’t count on the weakness extending argues Mialich who reckons this week’s Federal Reserve policy meeting will not foster any dollar strength and will allow the bulls to take EUR/USD back to the upper end of its recent range.

The Fed is widely expected to remain on hold this month and, importantly, maintain a cautious tone that avoids making any commitment on dates.

For the dollar, it is the promise of higher American interest rates in the future that fosters strength. Higher interest rates offer better yields to global and domestic investors who are likely to move vast sums of currency into the US ahead of any increases in yield.

This has been going on for some years now, but the stalling in interest rate rises has diminished this demand. In December 2015 markets were bidding up the USD as the Fed pointed to four interest rates in 2016. Now these bulls will be lucky if they get one.

Now that the April European Central Bank meeting has passed without drama, it would seem that the euro-dollar’s outlook is therefore ultimately a function of the Greenback at present, and when buyers will return.

We have noted here, analysts at Barclays, while not expecting any imminent advance in the US dollar, are increasingly of the opinion that the currency’s decline will find a base.

"In our view, the USD is set to stay weak and depreciate further, potentially more slowly than it has recently, since some of its previous overvaluation has already been absorbed," says Mialich.

UniCredit expect EUR-USD to resume a more bullish tone, at least towards the upper end of the 1.12-1.14 band.

Aiding the move higher will be an expected deceleration in US GDP data, also due on Wednesday.

In contrast the Milanese bank believes growth in the eurozone, where a new CPI estimate is also due, is expected to show a +0.5% recovery on a quarterly basis after +0.3% in 4Q15.

Beware a pro-USD Surprise

Of course readers should be aware that currency markets have a knack of throwing up surprises; what is the surprise in the above-mentioned scenario?

Markets are not expecting much from the Fed this April, and neither are they confident of an interest rate before the turn of the year, CME Group, for example, see a 41% chance of a 0.25% rate rise occurring in either December 2016 or February 2017.

If the US Fed painted a more positive picture at their April meeting these negative expectations may have to chance and the dollar rise accordingly.

“Our economist remains of the view that the next policy move is most likely to occur at the June meeting,” say Credit Agricole, offering a more bullish assessment for the USD.

Justifying this against-consensus call, analysts note that financial conditions have fully recovered (their FCI eased since March) and market inflation expectations have moved off their lows.

Any hawkish surprises could come from certain tweaks to the statement, eg, downplaying sluggish Q1 growth and/or a revised assessment of the balance of risks and global developments.

“More constructive tweaks to the statement’s tone would be consistent with the Fed’s call for continued rate normalisation this year and a further delay would be another blow to the committee’s credibility,” say analysts.

Yet, even Credit Agricole concede that obstacles remain:

“Incoming US data now points to a Q1 growth slowdown while the global growth picture remains in a precarious state. Nevertheless, the Fed is likely to downplay the Q1 growth slowdown. With the Fed’s emphasis on data dependence, the policy statement may be hesitant to offer any clues on near-term policy firming but at the same time it is unlikely to exceed dovish expectations.”

Euro to Dollar Rate Rising off 50 Day Moving Average

From a technical perspective, we are witnessing solid demand for the euro just above the 50 day moving average, presently located at 1.1212.

To be fair, the 50 day MA doesn’t offer us much predictive powers when it comes to EUR/USD (Whereas it seems incredibly solid in the GBP/EUR).

Nevertheless, the trend higher looks to be valid, "the EUR-USD may attempt to gravitate towards its 55-day moving average (1.1194), with net leveraged EUR shorts on the CFTC front increasing in the  latest week," says Emmanuel Ng, with OCBC Bank in Singapore.

Ng sees near-term resistance towards 1.1270 before 1.1300.