Projections for EUR/USD: Lean into Strength
The Euro to Dollar exchange rate looks to extend its recovery into the weekend.
This week we have seen the conversion spike to lows at 1.0453 ahead of President-Elect Trump’s press conference before rapidly recovering to the 1.06’s that we are seeing at present.
The exchange rate has actually been recovering since the 1.0340 was rejected in early January, so what we are witnessing at present is an extension of a rally that has been in place for the majority of 2017.
While the Euro is on the front-foot, it is worth noting we are fast approaching a key resistance area which could halt further advances.
“We still expect the upside to be limited to there for eventual renewed weakness, while a break of that region would force us to question whether 1.0350 was a more significant medium-term low,” says analyst Robin Wilkin at Lloyds Bank Commercial Banking.
“If one looked at the market once a day, it would seem nothing happened the last 24 hours and it signifies the current pull and tug within the well-established but nervous 1.04-1.07 range,” notes analyst Per Norr at UBS.
Like Wilkin, Norr is watching this well-established range to remain dominant.
“Short term upside risks remain but retain our medium term bias to lean against strength,” says Saktiandi Supaat at Maybank in Singapore.
Any pullbacks in EUR/USD will likely take us back to the bottom of the rang and Maybank see support remaining at 1.0480 (which is the 21 Daily Moving Average), a break of this invites a test of 1.0350.
Markets Misplaced Trump Conference
The big talking point for foreign exchange markets is the reversal of the Dollar rally.
The US Dollar carried notable impetus into Trump’s first significant press conference in weeks, clearly markets were looking for some kind of detailed confirmation surrounding planned tax cuts and spending plans.
“The lack of discussion of such elements has led some to presume that the Trump reflation trade may not be quite as substantial or real as hoped,” says Jeremy Stretch at CIBC in London. “For now it seems that USD bulls have proved to be compromised by what appears to be something of a Trump policy vacuum.”
However, Stretch argues that despite the market proving to have cherry picked the best bits of the policy platform and extrapolated the benefits it is too soon to expect USD bulls to throw in the towel just yet.
“Rather it is more of a case of needing to be a bit more circumspect and not necessarily buying ahead of potential policy announcements. Nevertheless after the policy disappointment of yesterday expect the market to look for policy clues in Trump’s inauguration address,” says Stretch.
More Dollar Strength Ahead
Per Norr at UBS reminds us that we shouldn't forget that the previous administration tried for eight years to get various parts of the sluggish US economy going with mixed results at best.
After all, if they would have succeeded, then they would not have been voted out.
It will certainly take more than a speech, a week before inauguration, to provide clarity, direction, and details of execution when it comes to the bullish sentiment.
Therefore this Dollar strength should not come as a surprise.
Yet, at the end of the day, USD trades at multi-year highs and Norr expects the USD to rule for a while longer.
This view fits with what we have been hearing from other major analysts; for instance HSBC point out that we should expect a temporary dip in the Dollar ahead of another major move higher.
“Longer-term, the move down through the 1.0450 region is arguably the last in the cycle from the 1.6020 highs set back in 2008. If so, 1.01-0.99 should hold any further declines. Failure to do so would risk a move towards 0.90,” says Lloyds Bank’s Wilkin.
