Euro-to-Dollar Rate: The Case for Buying EUR/USD on Dips

Image © DragonImages, Adobe Stock

- EUR/USD positioning in futures markets supports upside

- Political risks overdone, ECB rhetoric bullish, economy to outperform

- Technically, the pair has pulled back into the 'buy zone'

The Euro might have put in its lows for the year argues strategist Manuel Oliveri at Crédit Agricole in London who retains a view that the EUR/USD is a potential "buy on dips" prospect.

At the time of writing the EUR/USD exchange rate is certainly experiencing a dip: it has fallen back to 1.1715 amidst a wave of Dollar buying in response to the mid-week U.S. Federal Reserve policy update.

The Dollar's reaction to the Fed has largely been positive with the board members voting to raise interest rates by 0.25% and Fed Chairman Powell saying there are no plans to pause in 2019.

Investors had worried he might give a signal the Fed was going to lower its rate-path as it got closer to the hypothetical 'neutral rate', at which the economy is in equilibrium.

No such thing - Powell even suggested they might continue hiking beyond neutral.

While the Fed's dot-plot, which tracks changes in Fed official's expectations of the path of future interest rates, didn't alter, the commentary was hawkish and provided a positive reaction.

However, Oliveri's reckons the market's overall reaction to the Fed's actions is a muted one:

"On balance, yesterday’s announcement & press conference had only limited impact on central bank rate expectations and that explains muted impact on markets.

"One cannot exclude that the greenback stays subject to downside risks. Even though policy expectations appear broadly stable, speculative USD long positioning remains elevated... In particular majors such as EUR/USD may, therefore, continue to prove a buy on dips."

Amongst reasons for taking a potential punt on the Euro is positioning in the futures market which appear supportive of the single currency as speculative shorts are still overweight.

As an indicator, positioning works in a counter-intuitive way with overweight short positioning actually indicating the potential for a counter-trend move, i.e. upside.

The heavy positioning against the single currency is therefore actually signalling to some that the bet against the Euro is bloated and must shed weight.

ECB Supportive, Eurozone Economy Supportive

The Euro-Dollar rate spiked above 1.1800 earlier in the week after Mario Draghi said, in his testimony to the European Parliament, that underlying inflation had been subject to a “relatively vigorous pick up” and Crédit Agricole see further upside risks to EUR/USD from this channel.

Eurozone-wide inflation is expected to continue rising towards the ECB's target of just under 2.0%, even if near-term inflation readings undershoot, "there is a low risk of today’s data having any meaningful impact on central bank monetary policy expectations," says Oliveri.

Nor does Olivri see Italian politics as a risk factor despite some clear correlations with EUR/USD which fell after the news the Italian government was delaying its budget announcement.

"Caution with respect to Italy stays warranted. However, we do not expect politics to prove a sustained market driver," says Oliveri.

Economists at ANZ - the Australia-based global investment bank - have meanwhile told their clients to be on alert for a stronger Euro through 2019, largely thanks to the European Central Bank tightening monetary policy i.e. raising interest rates.

"Over the medium term we remain bullish, this is contingent on the economy continuing to improve and the ECB becoming more hawkish," says Been.

ANZ note Eurozone growth is stabilising, momentum is strong, labour market resource utilisation is rising, wages are rising, industry capacity utilisation is close to its highs, credit growth is expanding, house prices are rising and the ECB is confident that core inflation will move, gradually but persistently, towards target.

"These are not the conditions for a persistent slide in the euro. Barring a negative shock, we continue to expect modest Euro appreciation over the forecast horizon," adds Martin.

Technicals Advocate Buying on Dips

From a technical perspective, the pair is perfectly placed for a 'buy on a dip'.

The pair has pulled-back into the trendline drawn from the August lows in the 1.1670s and risen slightly. If it is going to resume its uptrend the trendline would be the most likely place for it to do so.

The exchange rate has also fallen back into the space between the 10 and 20 simple moving averages (MA), which is known as the 'buyzone' because it is the optimum place to buy an uptrending asset - another sign it is well-placed for a long entry.

One essential piece of confirmation, however, is still lacking on charts and that is for a bullish up-day to form, which we have yet to witness on EUR/USD.

Yet if such a bar forms there may be no better place to 'buy on a dip' than the current one.

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