Euro dollar exchange rate forecast: MIG Bank warn that the EUR/USD rally is overextended
The euro dollar exchange rate is 0.04 pct higher on a day-to-day basis at 1.3681 at 15:17 in London.
The dollar to euro is thus at 0.7309.
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Euro dollar exchange rate forecasted to head lower
We hear from analysts at MIG Bank, lead by Dieter Merz, who have told clients today that they see the euro dollar exchange rate rally as prone to an overextension.
However, before the possibility of a deep pullback the exchange rate markets could yet take the euro dollar rate to 1.4.
Merz says:
"Even though the odds of a further short-term extension towards the psychological threshold at 1.40 in the next few weeks have significantly increased, we do not see a lasting trend in EUR/USD strength. Looking at technical oscillators like the slow stochastics, we see that they are now overbought on both the short-term and medium-term time horizons.
"Even though these overbought conditions do not give a sell signal, they suggest that the rise in EUR/USD is overstretched and the re-release of investors positions in the currency market are likely to confirm a crowded trade. Therefore, the medium-term risk/reward of a long EUR/USD is not attractive."
Euro hits new highs following US deal
Forex markets have already started to discount that the short-term fix found by US politicians is, at the very least, expected to have a delaying effect on the tapering timetable.
As a result, the US dollar has weakened across the board.
In particular, EUR/USD has made new highs and is now close to its annual high at 1.3711.
"Indeed, the increasing probability of a new delay in the tapering process is EUR/USD positive, especially as the ECB remains on the sidelines thus far," says Merz.
As a result, the on-going negotiations among US lawmakers to find an agreement on the budget before 13 December are likely to have a significant impact on the USD, as the deadline is four days before an FOMC meeting. A failure to reach an agreement would likely lead the Fed to only start tapering in 2014.
However, we would not be aggressive buyers above 1.3711 as, notably, the longer term drivers of tapering in the US and the expected liquidity injections by the ECB should limit the medium-term upside.