Helaba: More Strength in the Euro to Dollar Rate (EUR/USD) to Come

us dollar exchange rate 2

The Euro remains well supported against the US Dollar with the next big move likely to be higher.

The Euro to Dollar exchange rate (EUR/USD) is seen at 1.1234 at the time of writing - well off the September best at 1.1317 but notably higher than the late July lows of 1.0951.

This tells us the short-term the pair is under pressure while in the medium-term the pair remains constructive.

Through the course of the September the pair has settled into a tight range with traders clearly digesting commentary from the US Fed and trying to gauge whether the central bank will deliver an interest rate rise next week.

The big cal now becomes whether or not that rate rise is coming as those who believe it is will be well-served by betting against the EUR/USD in anticipation of the Dollar strength the move will likely deliver.

On the other side of the equation, those who see no rises will be best served buying EUR/USD as a bet that the medium-term trend higher will restart following the Fed decision.

Indeed, US growth is simply not strong enough to warrant an increase in interest rates in September says Helaba Economics’ Ralf Umlauf in his latest intervention on the US rate hike debate.

The economist sees the recent volatility due to changing rate expectations as ‘over-done’ since the economy is not growing at the steady pace that would warrant a rate hike.

If Umlauf’s analysis is right, the resulting delay may put pressure on the Dollar, or at the very least see it maintain its current level and no more.

“We have already mentioned the mixed data situation at this point and indicated our scepticism surrounding an imminent increase in the key rate range. In our view, all of the US data publications on this week's calendar would have to surprise to the upside in order to create real potential for a move in September,” comments Umlauf.

The economist acknowledges bemusement at the hyped reaction of the markets before and after Fed official Lael Brainard suggested prudence should be exercised in setting Fed policy:

“The fears of a rate hike in the US that emerged at the weekend, which seemed completely irrational anyway given the current level of the key rate, have eased somewhat. Fed governor Brainard indicated that there was no need for premature tightening.”

He goes on to discuss how the ‘Neutral Real Interest Rate’, a measure of ideal, sustainable, up-trending growth is arguably still at 0.0% (it should ideally be between 3-5%) and that this stagnant growth, means the Fed is not at all likely to increase rates yet.

Umlauf concludes that although the rising price of oil – also known as ‘base effects’ – may lead to a rise in inflation, and increase interest rate hike expectations that way it will still not be sufficient to warrant a near-term rise in rates:

“While base effects will ensure a further rise in the annual inflation rate, it will clearly remain in negative territory. An increase in rate hike speculation would not be justified on this basis.”

Analysis of Euro to Dollar Exchange Rate: Range to Extend

Despite not expecting much strength from the dollar due to fading rate hike expectations, Umlauf is not more constructive on the EUR/USD pair, which he sees continuing in a range.

“EUR-USD is still trading above the 100-day moving average, but upside momentum is less than desirable, as also signalled by the indicators (MACD and Stochastic). Without any clear guidance for interest rates in the US, sideways trading will probably continue in a broad range around 1.10 for the time being.”

Hopes for future volatility in the moribund pair may be raised, however, by analysis from Swissquote’s FX Technician Yann Quelenn, who sees a possible triangle coiling into an ever tighter range on EUR/USD (see chart below).

“Strong support can be found at 1.1046  (05/08/2016 low). The symmetrical triangle  suggests further weakness,” notes the analyst.

Whilst we agree that there may be a symmetrical triangle forming but not necessarily that it will end in a bearish breakdown, as Quelenn suggests.

Symmetrical triangles have no bias when it comes to forecasting which way they will break, except that normally they go with trend.

Whilst the secular trend (very long term multi-year) is arguably bearish, the pair has been in a sideways trend for several years now and it could equally be argued there is no dominant trend.

As such we don’t know in which direction the triangle could break, nevertheless, when it does, if it does, it is likely to spell the start of a more volatile period for the pair.

Triangles are composed of a minimum of five sub-waves a,b,c,d,e, so currently the triangle is still only probably two-thirds of the way through.  

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