Euro-to-Dollar Could Fall to 1.1300 Now it’s Topped Out Say Commerzbank Strategists

Modified: Friday, 27 October 2017 09:25 BST
Written by: James Skinner

EUR/USD has topped out and with ECB tapering fading into the rearview, could now fall as low as 1.1300, but the long term outlook remains bright according to strategists.

The Euro-to-Dollar pair could fall as far as 1.1300 now it has topped out, according to technical strategists at Commerzbank, who have taken a bet on the currency pair falling to this level over the coming weeks.

Friday’s prediction comes amid an extended rout that pushed EUR/USD down through a key support level just beneath the 1.1700 point and lower by close to 100 points during overnight trading.

“EUR/USD has closed below 1.1662 the 17th August low and in doing so completed a top 1.2092-1.1662, this measures to 1.1232 and given the close proximity of the 200 day ma at 1.1245 we will market this our downside target,” says Karen Jones, a technical strategist at Commerzbank.

Friday’s move comes closely on the heels of a 125 point fall Thursday, in response to the European Central Bank opting for a so called dovish taper of its quantitative easing program, which already took the Euro-to-Dollar rate down from 1.1825 the previous morning.

“The outlook remains negative while capped by the current October highs and early August high at 1.1858/1.1910. Additional support is offered by the mid-June high at 1.1296 and the more important 1.1110 end of May low,” says Jones.

Throwing caution to the wind, the Commerzbank strategist is recommending clients sell the Euro-to-Dollar pair short placing a price target at around 1.1300 and a stop loss at 1.1860.

“Above 1.2092 would target the 50% retracement from the move down from the 2014 high at 1.2168 and the 1.2383 200 month ma, but if seen, that is expected to hold,” Jones adds, contemplating the point at which her prediction will have been invalidated.

EUR/USD was quoted 0.17% lower at 1.1617 during early trading in London Friday. It is still up by 10.57% for the 2017 year to date.

The ECB Can Have Cake and Eat It - For Now

The Euro was hit Thursday when the European Central Bank announced it will begin winding down its quantitative easing (bond buying) program as of January 2018.

“A EUR 30bn/month pace of bond-buying was exactly as expected and comments about avoiding a sudden stop in buying keep the door open to a few more months of purchases after next September,” says Kit Juckes, a cross-asset strategist at Societe Generale.

Markets were well prepared for the rate of bond purchases to be cut from €60 billion per month down to around €30 billion, with QE continuing until September 2018, but the ECB caught traders off guard when it left the door open to continue buying bonds beyond this time.

“The pieces are in place for a deeper euro correction but the longer-term fundamental case for a stronger euro also bears reiterating Economic growth momentum in the euro area is strong, and we see upside risks to growth next year,” says Juckes.

The minor tweak in the ECB’s tapering decision, allowing asset purchases to go on till September 2018 “or beyond” formed the initial catalyst for the ongoing sell off in Euro-to-Dollar.

“The ECB is set to have its cake in the form of a slower pace of bond-buying, and eat it with a satisfying side dish of euro softness,” Juckes muses. “Indigestion comes later, when the long-term uptrend resumes, as the euro’s cheap valuation and the steady improvement in the underlying pace of growth suggest it will before all that long.“

In the interim Juckes says he sees the Euro being vulnerable to a further move downward now that the eagerly anticipated tapering announcement is absent as a source of support for the common currency.

But there are other reasons to think that short sellers and other kinds of Euro bears might prevail in the short term.

“The ECB announced its QE changes minutes before Politico reported that Yellen and Warsh are out of the Fed Chair race,” says Kathy Lien, a managing director of foreign exchange strategy at BK Asset Management.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.

Fed Leadership News-flow Favours A Stronger Dollar

In America, and elsewhere, traders are focused keenly on who will win the race to lead the Federal Reserve from 2018 onwards and Thursday saw incumbent Janet Yellen and one other rival more or less ruled out of the race.

The two surviving frontrunners are Stanford University economist John Taylor, who is perceived as a hawk likely to favour steeper interest rate hikes, and governor Jerome Powell who is known as a dove in favour of a more modest tightening.

Both the Fed chair and vice chair positions are vacant. If they are filled with Powell and Taylor then it could lead markets to recalibrate expectations for future interest rate hikes in the US - likely in a way that favours a stronger Dollar.

An announcement could be made as soon as the weekend but most likely before the end of the first week in November.

Tax Cuts and Reforms Clear Two Major Hurdles - End November in Focus

Another factor driving the US Dollar higher and placing downward pressure on the Euro-to-Dollar pair is President Donald Trump’s drive to push some of the largest tax cuts in history through both congress and onto the statute book.

With the passing of the Republican’s 2018 budget bill through the senate and now the house of representatives, the President has overcome two major hurdles in recent weeks.

The budget bill provides scope for unfunded tax cuts that some have said may increase the budget deficit by up to $1.5 trillion.

That said, unfunded tax cuts that add to the deficit are those that are most likely to lift economic growth thereby boosting inflation expectations and raising the path of future interest rates implied by financial market prices.

Higher interest rate expectations are the primary transmission mechanism through which tax cuts lead to a stronger US Dollar.

A formal legislative bill documenting President Trump's tax cuts and reforms is expected over the coming days and republicans are thought to be aiming to have it passed through congress and onto the statute book by Thanksgiving, which falls on November 23.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.