Euro-to-Dollar Rate Outlook: Hammer Candlestick not Enough to Suggest "Buyers are Back in Town"

There is a chance the Euro might about to turn a corner and move higher against the US Dollar argues Forex.com’s Fawad Razaqzada.

After sliding lower during most of September EUR/USD could now be in the process of basing, after touching key support and forming a hammer candlestick – which is a bullish reversal sign.

This is the view of Fawad Razaqzada, an analyst with currency trading providers Forex.com. who notes "EUR/USD has formed a hammer candlestick pattern on Friday around this key support level."

"This continues to show that the buyers are still trying to defend their ground," says the analyst.

Razaqzada tempers his bullish analysis with a note of caution, however, which is that the hammer needs confirmation from another bullish candle or a break above a key chart level.

“While the hammer is a bullish price candle, we are yet to see a break of a key resistance level or some other confirmation to suggest that the buyers are back in town. For me, a clear move back above 1.1825 would mark a break in market structure,” says the analyst.

But Others see Further EUR/USD Weakness

His call, which implies Euro strength and Dollar weakness – or at least Euro outperformance – contrasts to a certain extent with the thrust of Société Générale’ (SocGen), FX Analyst, Alvin Tann’s recent call for more Dollar strength – or an extension of the ‘Dollar bounce’.

“The FOMC minutes, US CPI and Yellen speech will provide crucial signposts for the ongoing dollar rally,” says Tann in reference to the main events on the economic calendar this week.

Tann remains positive on USD in the near-term because he says, “the market continues to underprice the probability of a December Fed hike.”

We are not clear about J P Morgan’s immediate short-term view of EUR/USD and how it compares with Forex.com’s cautiously bullish call or SocGen’s more bearish view expressed by their strong-Dollar view, but their updated forecasts suggest a bullish end to the year with a 1.20 forecast for the end of 2017.

They then see the pair trading in a range in Q1 of 2018 due to Italian elections as the anti-EU Five Star party will no doubt be a contender, and “US bullish factors” to dominate, says JP’s FX Strategist Meera Chandra.

Come September 2018, however, and they forecast EUR/USD to hit 1.25, “as market focus shifts to possibility of rate hikes.”

They think that the ECB will announce an extension of QE at the October meeting, but at a much lower 20bn/month level.

They feel the main driver for EUR/USD is a less dovish European Central Bank (ECB) and this is still their base case.

Further integration along the line of Macron’s plans for fiscal union, are not a major driver for the Euro either way according to Chandra.

“German elections have dampened expectations of an aggressive push for further integration, but our medium-term bullish view has always been based on ECB policy rather than expectations of such reform in any case,” she said.

The Euro is likely to rally at least another 10% on the back of end-of-QE expectations, according to previous examples from currencies’ whose central banks have exited QE.

“Even though the euro has strengthened by 15% in TWI terms since the post-QE bottom, historical experience from other major currencies where markets perceived an impending end of QE programs showed a larger, 26% strengthening in TWI on average,” says Chandra.

The Dollar, for example, rallied by as much as 27% from its post-QE bottom, Sterling rallied by 22% as markets priced in a less accommodative policy from the BOE and the Yen gained by 30% post QE2 as markets “doubted the inability of the BOJ to deliver any additional QE,” said the analyst.