EUR/USD Still on Target for 1.08
We remain constructive on our outlook for the Euro to Dollar exchange rate despite its mid-week failure to jump above the 1.07 threshold.
EUR/USD encountered resistance in the vicinity of 1.07 mid-week and moved back down to the mid 1.06's as some strong US economic data combined with a positive speech from the US Fed Chair Yellen.
"A series of healthy U.S. economic reports followed by a positive Beige book carved out a bottom for the U.S. Dollar. The currency's rebound was then magnified by optimistic comments from Janet Yellen. U.S. rates also shot higher with 10 year yields rising nearly 10bp, validating the reversal in market sentiment," says Kathy Lien, Director at BK Asset Management in New York.
The Dollar was able to recover some lost ground on these events, but we would guard against any sustained weakness in the EUR/USD exchange rate at this stage.
The short-term trend has already, arguably, turned up as it is showing an extended sequence of rising highs and lows on the 4-hour chart, which is normally the first sign of a new uptrend.
A break above Tuesday’s highs at 1.0719 would probably confirm an extension higher to a target at 1.0800.
An obstacle to further upside is provided by the R1 monthly pivot at 1.0808 and the exchange rate is likely to pause if not pull-back at that level if it reaches it.
Momentum is now picking up as well providing further back-up for the bullish case.
Swissquote analyst, Yann Quelenn, is also bullish in the short-term.
“EUR/USD's momentum is still positive despite some consolidations. Strong resistance is given at 1.0874 (08/12/2016 high,” said the analyst.
Commerzbank’s Karen Jones sees a see change as resulting from a the break above 1.0700, and is now bullish the pair.
“Should the market go above 1.0700, we remain unable to rule out a move to 1.0820 – the 50% retracement,” she said in a recent note seen by Pound Sterling Live.
Credit Suisse Caution that Period of Dollar Strength Could be ending
Recent US Dollar weakness has partly been caused by comments from Donald Trump that the US Dollar was too strong, which markets took as a sign he might put pressure on the Federal Reserve to delay tightening monetary policy.
The Fed plans to raise interest rates at least three times in 2017 according to market pricing, and should these expectations be pared back then we could see the USD decline.
The fear now for Dollar bulls is that Trump will adopt an anti-Dollar stance and try to talk the currency down.
"For the USD, weekend comments by president-elect Trump specifically referencing dollar valuation are an important development," says Shahab Jalinoos at Credit Suisse. "Although it was mostly aimed at the USDCNY rate, the idea of US political intervention in FX markets introduces a new (inasmuch as it's not been seen since the 1980s) and unpredictable element for the market to absorb."
With Trump transition team member Scaramucci also referencing USD valuation, saying "we have to be careful about the rising currency", Credit Suisse believe the quiet period on this front since the November 8 election that allowed persistent Dollar strength seems to be at an end.
"We can easily imagine EURUSD testing the December highs near 1.09 before resuming its downtrend towards our 1.03 3m target," says Jalinoos. "A clean break above 1.09 would force us to reconsider more carefully our medium-term dollar view."
ECB Meeting: Stay Awake
The meeting of the European Central Bank (ECB) on Thursday may cause some volatility for the pair.
Inflation data for the Eurozone, out on Wednesday morning, showed steady progress higher, with a 1.1% annualized rise and a 0.9% increase in Core.
This was viewed as potentially impacting on the outcome of the European Central Bank’s policy meeting on Thursday.
"The EUR is vulnerable as we head into and through the ECB today. The recent gains through 1.07 have likely reduced the market’s conviction in the underlying bearish view from last year. Our bias is that we still see a move towards 1.0250, while under 1.08/1.0850," says Robin Wilkin at Lloyds Bank.
So, on the day, Wilkin is watching supports as stepping stones to the level below, lying at 1.0615, 1.0515/10 and then the 1.0355/40.
Xtrade’s Paul Siriani said that he thought the data might embolden Germany to push for a winding up of the ECB’s stimulus programme at Thursday’s meeting.
Any such move would be positive for the Euro. Sirani notes:
“Today’s perky inflation figures are the latest sign that the European economy could surpass expectations in 2017.
“Cutting the sustained stimulus programme will surely be high up on the agenda at Thursday’s Council meeting, with Germany the main protagonists.
“However, ECB President Mario Draghi is likely to remain cautious of the road ahead. Concerns over political turbulence in the coming months may continue to influence monetary policy more than recent data."