Euro dollar exchange rate (EUR/USD) approaching upside limits at 1.35
The euro dollar exchange rate is marginally lower on Wednesday morning; EUR/USD is quoted at 1.3431. The euro pound exchange rate is meanwhile trading 0.06 pct higher at 0.8453.
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The euro's continued strength remains a talking point in the global FX space; with many a commentator expressing surprise that the euro sell-off didn't go further following the surprise interest rate cut at the European Central Bank (ECB).
Indeed, the euro pound exchange rate continues to steadily climb higher and successfully recapture lost ground.
"The EUR/USD refuses to fall despite its obvious disinflation and growth problems. As mentioned on Monday, investors haven't given up on buying euros because they believe that the recent rate cut by the ECB is a one off move but if price pressures do not start to rise, the ECB may have to ease again," says Kathy Lien at BK Asset Management.
1.35 will be the limit for the euro
Despite the dogged determination of the euro-buyers there is a sense that these current levels in the euro dollar exchange rate are numbered.
Lloyds Bank Research suggest anything north of 1.3450 is a good selling level:
"The EUR/USD recovery has put it back close to the levels suggested as fair by short term yield spread models, but it is hard to see a break back above 1.35, which suggests anything above 1.3450 is a good short term selling opportunity.
"Nevertheless, in the absence of Eurozone news we would look for support to be found around 1.3360."
Lien believes that the trigger for further declines in the euro rate will rest with a realisation that the forex markets are not in tune with the US bond markets:
"In the near term, U.S. yields are rising and we would be surprised if the EUR/USD will be able to ignore the move for much longer. We believe that the downtrend in the EUR/USD remains intact as long as the currency pair remains below 1.3550."
US dollar hits resistance
Turning to the US dollar side of the equation, there has been little US news this week but momentum remains positive for the USD ahead of some keen resistance levels.
"While the USD is still biased higher on momentum, recent highs in the USD index at 81.48 appear good resistance, with major resistance at 81.80," say Lloyds Bank.
Yesterday’s dip in the NFIB small business optimism index for October underlined that even though there doesn’t appear to have been any direct impact on employment from the government shutdown, judging by the October employment report, confidence has been hit, both for consumers and businesses.
"This might not be reflected in reduced activity, but there is still a risk that it will in the coming months, so more data looks necessary for the USD to make gains based on an improved US outlook, especially given the continued uncertainty surrounding the Budget negotiations," say Lloyds.
For today, there is nothing of note on the US calendar except a speech from Pianalto, and while the market is interested in any indications on Fed policy, we doubt this will provide any new insights.