EUR to USD: Euro Dollar Exchange Rate Prime Candidate for a Breakout

By Rob Samson

Is the euro dollar rate due to make a concerted leg lower? We consider the latest happenings and predictions on the euro issued today.

The EUR to USD rate broke lower yesterday after holding within a 1.3700-1.3780 range all week.

It is this tight range that has drawn attention with some analysts suggesting it is this that makes the euro dollar exchange rate a prime target for a break-out move.

"In the case of the EUR/USD volatility is near a 6 year low.  This makes the currency pair prime for a breakout and we are already beginning to see an increase in volatility today with EUR/USD dropping to a 1 week low," says Kathy Lien at BK Asset Management.

A look at the FX markets in mid-morning trade in London shows:

Why is the euro lower?

It was argued that growing tension between Russia and Ukraine and concerns about potential spill over into the Eurozone weighed on the EUR yesterday.

However, Lloyds Bank argue that unless we see a further escalation in the situation, further EUR downside related to Ukraine should be limited for now.

However, with the situation in the Crimea hotting up on Thursday morning we would not say the Ukraine factor should yet be discounted fully.

Eurozone data releases will likely be key to the euro's outlook.

German unemployment will likely attract some interest however the German ‘flash’ CPI estimate for February will be the main focus.

"We have had a number of ECB officials explicitly state this week that there is no risk of deflation in the Euro area, and Draghi’s recent comments putting focus on the March ECB meeting suggesting the ECB council will have a ‘full set of information needed for deciding whether to act or not’ has perhaps increased the focus on the February CPI numbers," say Lloyds.

Technically speaking

Concerning the technical outlook for the euro dollar exchange rate, Lien says:

"The break below 1.37 is significant and leaves the currency pair vulnerable for an extended sell-off down to 1.36. However in order for that to happen, tomorrow's German unemployment report needs to be surprise to the downside.

"Economists are looking for a smaller decline in unemployment but according to the PMIs, February was the strongest month for job growth since January 2012. Aside from the labor market report, German consumer prices and Eurozone confidence numbers are also scheduled for release.  

"CPI is expected to increase sharply in February after falling in January and a rise in price pressures will ease the central bank's concerns about low inflation.  

"On Monday we said that euro would have a positive bias this week and although it has fallen, if German unemployment drops more than expected and CPI rises by 0.6% or better, EUR/USD could resume its rise."