Euro Exchange Rate Forecasts: EUR Strength Could be Reaching its Limits

The euro to dollar exchange rate is well above the ECB’s preferred level, and this spells danger for euro bulls determined to bet on yet further advances. However, charts suggest the upside limit of 1.17 is still possible.

Euro exchange rate forecasts

Will the euro to dollar exchange rate’s impressive rally, take a terminal hit from the ECB soon? We believe it could.

"A stronger EUR/USD makes the price transmission mechanism in the Euro-Zone slower, which is becoming problematic for the European Central Bank now that the spot rate is rising above the ECB’s NEER,” points out Christopher Vecchio at DailyFX.

The ECB’s 2016 technical assumption at $1.0900, the max closing level this week in the spot price has thus far been +3.87% above the EUR/USD NEER.

Ahead of the ECB pre-announcing its deposit rate cut at its October meeting, EUR/USD had closed as high as +3.37% above the ECB’s technical assumption for 2015 (at the time: $1.1100).

“It's time to start becoming a bit more skeptical about the Euro up here - trusting the ECB to keep quiet up here seems like a bad bet. EUR/CAD (as explained in the video) may be a reversal candidate in its multi-month uptrend,” says Vecchio.

The euro to dollar rate is in the ascendency

If we look at the above, all technical drivers advocate for further gains with the EUR to USD conversion trading above all the key moving average levels.

Our best-guess is that the euro will fall into a new range above 1.10 but below 1.14-1.15 based on ECB action.

We doubt the ECB has the fire-power remaining to prompt a substantial decline back towards 1.06.

"The near term pullback suggested by divergence in momentum materialised on Friday, as EUR traded down from 1.1355 (below channel resistance) to a low of 1.1214," says Gajan Mahadevan at Lloyds Bank, "we favour this move to extend, with 1.1170 – 1.1050 the key support region to the downside."

A break of this area would suggest that a lower high is in place within the medium term range.

"However, should risk aversion regain control, EUR could catch a bid tone, as it has been used as a relative “safe-haven”. Key resistance is at 1.1370 – 1.1450, with a move through here opening up a re-test of the 1.17 highs," says Mahadevan.

US Dollar Finds No Love

The dollar is meanwhile finding little bidding action as foreign exchange traders slash their expectations for a US Federal Reserve rate hike, even by November 2016, to zero percent.

No doubt, the turmoil on global stock markets will be driving this perception; why would the Fed risk an interest rate rise in such difficult conditions.

The scheduled appearances by Fed chair Yellen in front of the two houses of the US Congress failed to produce the desired clarity on the US interest rate trajectory going forward.

Nevertheless we saw Janet Yellen play a steady hand as she emphasised that data dependency would ultimately determine decisions making.

The Euro to Pound Exchange Rate Forecast: Euro Still Favoured

Sterling was a top performer Friday, rising against the dollar and bouncing above one-year lows against the euro.

Stocks and commodities got off to a positive start Friday, helping to diminish worries about shrinking profits in the banking sector, a key growth engine of the financially-influenced U.K. economy.

“The market remains less than sanguine on the pound, though, with uneven growth keeping a U.K. rate hike off the table, while uncertainty remains high over the country’s future in the EU,” says Joe Manimbo at Western Union.

At the time of writing the euro to pound sterling exchange rate is quoted at 0.7772.

Nevertheless, “we favour the euro against the pound. “EUR/GBP remains on target for 0.8030/50, this is the measurement higher from the base 0.7492-0.6937 it is also a Fibonacci retracement and we would expect to see initial failure in this vicinity,” says Karen Jones, technical strategist with Commerzbank.

Longer-term the picture remains as clouded as ever.

Consider the glowing assessment of the pound’s outlook conveyed by BNP Paribas for example:

“The outlook for the GBP is positive, and we expect solid UK GDP and accelerating wage growth to prompt the BoE to deliver tightening sooner than the market expects. The UK’s balance of payments position is strong, with the current account deficit financed by FDI and portfolio investment inflows.”

Then consider the view that HSBC warn of a 15-20% decline in sterling in the event of a British exit from the European Union.

In fact, this assessment is an important one to take into account if you are watching sterling as it shows four different scenarios for 2016. More details on the HSBC views can be found here

The outlook certainly is clouded by the EU referendum but with a key summit of European Union leaders due this week the issue will gain more prominence.

Because sterling is so heavily sold at the present time, and trading below where it should fundamentally be, the risks for an upward surprise are elevated.