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The Euro to Dollar exchange rate has recovered the 1.10 handle and tested an important resistance level on the charts but strategists at ING say it could have scope to advance toward 1.12 into quarter-end.

EUR/USD rallied to new year-to-date highs around 1.1046 previously on Wednesday after overcoming resistance from the 61.8% Fibonacci retracement of its December downtrend at 1.0935 on Tuesday.

This has seen the single currency test the 78.6% retracement of the downtrend at 1.1025, which is the last technical defence of December highs around 1.1140, and could be a bullish signal about the outlook.

“The prospect of the US economy and interest rates converging on the lower levels in the rest of the world is proving supportive for EUR/USD,” said Chris Turner, regional head of research for UK & CEE at ING.

“We see EUR/USD supported at 1.0985/1000 and any softer US activity data could drag it up towards 1.11,” he added in a Thursday note to clients.

Above: EUR/USD shown at daily intervals with Fibonacci retracements of December downtrend indicating possible areas of technical resistance.

Turner and colleagues said in their August forecast review that EUR/USD could have scope to reach 1.12 in the weeks ahead before ebbing toward the end of the current quarter in September.

They see the recent dovish repricing of the Federal Reserve interest rate outlook and resulting compression of the US Dollar’s yield advantage over the Euro as the primary driver of the expected recovery.

“We would like to keep this bias [toward 1.12] for the time being even though the prospect of European fiscal consolidation and potentially wider sovereign spreads may reappear in September,” Turner said.

Another factor that is potentially supportive of the outlook for EUR/USD is its perfect negative correlation with the twists and turns of the Euro Area inflation cycle over the years since the onset of the pandemic.

This, and the European Central Bank’s outlook for a continuation of the disinflation process over the coming months, also implies scope for a further recovery in the Euro to Dollar rate up ahead.

Euro to Dollar rate shown at weekly intervals alongside annual Euro Area inflation rate.