Euro exchange rate forecasts: Avoid Shorting the EUR above 1.360-1.365 Warns Analyst

By Sam Coventry

The euro exchange rate complex is seeing a mixed day of trading with strong gains being made against pound sterling and modest gains against the US dollar. However, the outlook is clouded by the ECB who announce their February decision on Thursday.

A look at the foreign exchange markets in early afternoon London time shows:

• The euro dollar exchange rate is 0.07 pct higher at 1.3495.
• The euro pound exchange rate is 0.61 pct higher at 0.8255.
• The euro Australian dollar exchange rate is 0.5 pct lower at 1.5327.

Be Aware: All our EUR quotes are taken from the inter-bank markets. Your bank will deliver your currency after levying a spread on the rate. However, an independent FX provider will guarantee you a more competitive spread, thus delivering up to 5% more currency. Please learn more here.

Euro dollar exchange rate forecasts

Pound Sterling Live present a selection of euro exchange rate forecasts issued by those research houses we follow.

Bill McNamara at Charles Stanley has the following forecast for the euro dollar:

"The single currency gave up ground relative to the dollar last month and its 1.85% decline was its weakest performance since last February. The long-term line chart below demonstrates that the level from which the euro retreated was not completely arbitrary but represented, in fact, a reaction to resistance in the form of a downtrend that has been in place since the summer of 2008.

"The broader technical picture is indicating that there is still scope for further weakness in the near term and a fall to around 1.335 has now become likely."

Craig Erlam at Alpari UK says:

"Having broken below the ascending trend line and the 61.8 fib level, the euro is looking very bearish against the dollar again. The pair had previously been holding up above the 1.35 level, leaving some hope that all we were seeing was a brief retracement.

"However that now appears to have been dashed with the close below these key support levels, potentially prompting a much larger pull back in the pair.

"The next level of support for the pair should be found around 1.3458, the 38.2% retracement of the move from 9 July lows to 27 December highs, and a previous level of support and resistance. Further support should then be found around 1.34, followed by 1.3370, 200-day SMA, 1.3323, 50 fib level, 1.3306, 50 and 200-week SMA’s, and 1.3190, 61.8 fib and the ascending trend line, which dates back to 24 July 2012."

Pound euro exchange rate forecast

Concerning the pound to euro, McNamara says:

"The pound added just over 1% relative to the euro in January and, as the chart shows, this has brought it into contact with downtrend resistance, at 1.22 or so. In fact, it is worth noting that sterling has recently been as high as 1.223 so it is entirely possible that its upside momentum will lift it through that trend-line before too long. In the meantime, the 50-day MA should provide some support at around 1.20."

Flipping the equation around to EUR/GBP, analysts at ICN Financial say:

"The pair is now testing the Falling Wedge support at 0.8205, and Stochastic is attempting to gain positive momentum to support the upside move. In general, as far as the EURGBP holds above 0.8160 the upside move remains in favor, targeting 0.8285 then 0.8355, where a breach above the latter will extend gains toward 0.8560 areas."

ECB decision dominates outlook for the euro exchange rate complex this week

We have so far considered the technical outlook for the euro, however a consideration of the fundamental outlook confirms that upside in the EUR will be capped ahead of Thursday's ECB decision.

Greg Anderson at BMO Capital says:

"For the EUR, at the start of next week, we suspect much of the focus will temporarily move away from potential ECB policy shifts in 1H and more towards developing market distress.

"Expectations of some type of shift in ECB policy appear to have contained upside in EURUSD below 1.360 for most of January. However, in addition to periodic tightness in EUR front-end rates, the EUR now has to contend with another potential upside risk: developing market distress.

"Episodes of EUR strength during developing market distress suggest that the EUR is still being used quite heavily as a funding currency, with that property contributing to EUR strength during periods when those cheaply funded trades are unwound. These aforementioned ‘funding properties’ are helping to solidify the EURs role as an essential component of the global monetary system, and this has happened mainly as a result of Mario Draghi’s pragmatism.

"In the knowledge that the ECB is unlikely to engage in some type of ‘masochistic’ interest rate hike any time soon, investors have embraced the EUR as an important currency to fund higher yielding trades.

"We’ve seen a general widening in peripheral Euro Area spreads at the end of the current week, and that should generally contain some upside in EURUSD.

"However, we’d avoid being aggressively short of the EUR above 1.360-1.365 until it’s clear that developing market distress has subsided a bit and longer-term nominal US yields are free to start moving back up again. We look for a 1.355-1.374 range in EURUSD for the week, but expect upside risks in the pair to dominate for the first three sessions, through the FOMC on Wednesday."