Euro / US Dollar Outlook: Barriers to Further Advances Located at 1.1420 and 1.1505

The euro to dollar exchange rate trades near the upper end of its recent ranges confirming the shared currency is a natural beneficiary of a shift towards Remain winning the upcoming EU referendum.

The euro is testing its recent range highs against the US dollar but there are notable barriers ahead.

These levels must be broken if markets are to be convinced that the EUR/USD is capable of hitting fresh highs in 2016.

"A break of 1.1420 and then 1.1505 is needed to suggest a stronger move is possible. Until then further range trading is expected in the next couple of days, with 1.13/1.1285 pivot support in this regard," says Robin Wilkin at Lloyds Bank.

The solid technical structures in the market, combined with the risks inherent in the EU vote, are likely to combine to keep the euro's advances capped.

The good news for euro bulls is that and the market is suggesting to us, just days ahead of the vote, that Remain is headed for victory.

This is clearly a pro-EUR/USD scenario for a currency whose future depends on the Eurozone staying intact.

A Reuters poll at the beginning of May suggested a number of countries including France, Germany, Italy, Spain and Belgium would like their own referendums with one third of the 6000 people polled saying they would vote to leave the EU if given the chance.

June 26th is the date for the Spanish election and the summer months could well see another migration crisis.

The Eurozone is still in deflation and Europe is showing no signs of changing its structure – fiscal or otherwise. When you also consider that the UK is the second largest economy in the EU and contributes 9% of its budget a Leave vote is like to be as detrimental to the Euro as it is to Sterling the long run.

"Generally speaking the Euro has far more negatives than positives at the moment and in the event of a leave vote we would expect an initial move down to test the recent low in the 1.04 area and for Eur/$ to remain soft through Q3," says Lucy Lillicrap, an analyst with AFEX.

A Remain vote would likely see little change in the medium term fortunes of the euro, although the initial reaction could see a move higher to test the top of the recent 1.10-1.15 range suggests Lillicrap.

We wrote on Sunday that if EUR/USD can break clearly above the 50-day moving average (at 1.1300), which is currently preventing any further progress higher, it should gain the necessary momentum to move back up towards the 1.1450's.

Analyst Karen Jones at Commerzbank agrees that the late 1.14's are a good level to target:

"EUR/USD last week sold off to, tested and held the base of the 2016 channel, today at 1.1133. The intraday Elliott wave chart is suggesting a retest of potentially 1.1465/95, where we would expect failure."

Such a move up would be confirmed by a move above 1.1330, with the next target thereafter at 1.1450, just below a major resistance line - a monthly pivot (PP) - at 1.1465.

Pivots tend to act as obstacles to price trends as they attract a lot of counter-trend orders from traders positioning to trade the pull-back.

The possibility that there will be more upside is supported by the longer-than-average bullish hammer candlestick (see chart) which formed on Thursday, which is a strong sign of further gains in the short-term and the strong up-move from off the 1.1096 May lows (see chart).

Panning out to the weekly timeframe and the observer can see that the exchange rate is still rising within a channel, which began at the 1.0538 November 2015 lows.

This move up, however, is situated within an even larger multi-year long sideways range which began at the March 2015 1.0456 lows, and seems to have a ceiling in the 1.17s and a base in the 1.04/5s.

The euro is likely to be highly susceptible to the UK referendum as a win for Brexit would probably lead to a weakening of the euro, as it might cause 'exit' contagion to spread to other EU member states threatening the cohesiveness of the EU.

The euro, however, would be expected to appreciate versus the dollar in the event of the UK voting to remain in the European Union.

Data to Watch

Data out in the US includes Existing Home Sales on Wednesday, which are expected to rise to 5.5m from 5.45m previously and Crude Oil Inventories.

Thursday sees the release of New Home Sales in May, which is forecast to fall from 578k from 619k previously.

On Friday Core Durable Goods Orders (mom in May) are expected to show a slower 0.2% rise than the 0.5% of the previous month.

From the Euro-zone the news will be dominating by German ZEW Economic Sentiment in June, which is forecast to come out at 5 from 6.9 previously, German Manufacturing PMI in June, which is forecast to fall to 52.0 from 52.1 previously and the German IFO Business Climate Index, which is forecast to fall to 107.5 from 107.7, also in June.

Broker TD Securities are biased towards expecting a slightly higher result for German Manufacturing PMI:

"We look for the German manufacturing PMI to eke higher. New orders were still solid in May, and German data in general has been coming in above consensus, so the economy may have a bit more positive momentum than markets are factoring in."

Data from futures exchanges suggests the probability of more upside for the euro on Monday as net short -  or sell - positions have reversed their decline in the week ending June 14, and this, combined with the fact that the previous week's level formed a trough low, is a 'pivot' indicating more upside on Monday.