Euro's Rally to Hit a Brick Wall at 1.0829 Dollars

The EUR/USD exchange rate has climbed from its February lows in the 1.05s to a current market rate of 1.0755.

The pair has been propelled higher by a mixture of diminishing political fears in the Eurozone and the unexpected fall of the Dollar following hints of caution in the

Fed’s last statement, and the decision of one member to vote against raising interest rates.

Analysts are now posing the question of where the EUR/USD will come to rest before turning south again. (Of course this is based on the assumption that the Dollar's cyclical upswing is not yet done, nor is the Euro's downswing).

Commerzbank’s Karen Jones takes her cue from the charts and notes that the pair may well struggle to overcome resistance at the 1.0829 highs.

“Last week’s advance is likely to fizzle out below the 1.0829 February high. As long as it caps, a slip back to the 1.0679 mid-February high may be seen this week,” says Jones in a client note dated March 20.

The idea that 1.0800 is an important line in the sand for the pair is shared by other analysts.

Kit Juckes of Société Générale notes how this is the third time the pair has revisited the 1.0750-1.0800 zone since the inauguration of Donald Trump, and that “A break of 1.08 would be significant, at least psychologically.”

He notes how the Dollar has weakened considerably following the US government’s protectionist rhetoric at the G20:

“Sentiment towards the dollar has deteriorated significantly, and the weekend news that the US effectively forced the G20 to drop its commitment to fighting protectionism, has produced a morning market mood to match the weather - damp and grey. Asian equities are somewhat softer, commodity prices a little lower, the dollar down modestly but pretty much across the board.”

If there is something the Trump administration want and need it is a weaker Dollar, so the use of tough trade talk to achieve that end may be a feature of the future, and we could see more similar declines.

The fall in global risk appetite on the back of the rise of US protectionist talk is also likely to support the Euro because it rises on risk aversion due to its role as a funding currency of risky assets.

During times of high risk these assets are unwound and the Euros get repatriated increasing demand and the value of the single currency.

Nordea Markets, meanwhile also forecast a continuation of the uptrend in EUR/USD, due to the “transatlantic spread in bond yields.”

US yields have fallen back down, whilst German bund yields have risen on diminishing chances of far-right election victory in either Holland, France or Germany.

And once again we have the magic 1.0829 level crop up.

“Flash PMIs out this week, and so far, Europe – in contrast to the US – has been reaping benefits of a weaker currency and hasn’t seen a slowdown in credit. So relatively, it should fare better than US – or have a later/softer landing. But it won’t avoid one, too. For now, the EUR/USD will likely keep edging higher, to new year-to-date highs (1.0829), as the transatlantic spread (USD-EUR) narrows from historic highs,” says Aurelija Augulyte at Nordea Markets.

Augulyte characterises the Dollar as a peaking asset on the brink of decline.

Not only is the US data surprise index, which measures overshoots and undershoots in data in ‘overbought territory’ and ripe for a pull-back but the Strong Dollar is also now having a negative effect on the economy.

At its current Dollar levels Manufacturing will at best flatline; at worst decline.

“Say, the USD stays at these levels – base effects are negative to industry at least until October. Also, should oil prices stay at these “comfortable” levels for the rest of 2017, we will probably see industrial contraction in the US by New Year!” Said Augulyte.