EUR/USD: Is a Move Back Down to 1.0815 on the Cards?

Could the euro be losing its shine, and if so is the euro-to-dollar pair set to move back down into the range?

As sentiment has started to sour against the euro – partly because of lacklustre Spanish data as well as post-election uncertainty – and with the dollar continuing to power higher, EUR/USD has depreciated, hitting lows of 1.0899 in recent trading. 

Some analysts are expecting even further weakness as the year comes to a close and portfolio managers readjust their hedges, with Citi Bank expecting year end flows to lead to: 

"buying of EUR and selling of all other currencies Vs USD as foreign investors in EZ assets readjust their hedges."

The one outstanding significant data release for 2015 is U.S Jobless and Continuing Claims out this afternoon, although they are not usually associated with much volatility. 

The technical picture is rather confusing as it begs the question whether the current corrective move, which started with the spike higher after the ECB meeting is really a part of a bigger correction which could go higher or whether it has now run its course, and the themes which dominated the longer-term trend have re-emerged and are starting to force the currency down again, in line with the dominant longer-term trend.

If a recent SocGen note outlining a high correlation between Treasury yields and Oil and the U.S Dollar are to be believed then a major factor responsible for the most recent move lower in EUR/USD was probably a rise in 2-year Treasury Bond yields, which have run higher recently following a major auction in Monday, due to a steadily more hawkish Fed outlook for interest rates in 2016.

The 3.0% bounce in oil at the start of the week (before today’s bad inventory data pushed the commodity back down again) probably also contributed to renewed dollar strength, although this would have been predominanlty in commodity currency pairs.

Treasury yields look like they are in a strong bull run, particularly the 2-years, which could be set to go higher, lending the dollar strength in the process.

According to SocGen a “super-simple measure” indicates that a not inconceivable rise in the 2-year Treasury yield to 2.0% (currently at 1.0830%) would see a corresponding fall in EUR/USD to “parity.”

Back to the technicals, however, and we see that whilst the pair looks to be potentially rolling over on the 4-hr chart, there are substantial support levels lying in ‘phalanxes’ below, starting with the R1 Monthly Pivot at 1.0891, then the 50-day MA at 1.0850, only 41 points below, and finally the 1.0800 lows.

Assuming even those are breached, the Monthly Pivot is then not far below at 1.0725; so whilst the road lower looks oddly the more probable for the next move, these levels could make it a bumpy ride.

Nevertheless, a clearance below the R1 pivot, signalled by a move below the 1.0869 lows, could probably see the exchange rate fall to 1.0815 – and although support from the 50-day MA at 1.0850 might impede progress, recent price action has not respected the moving average particularly, so it is possible it might disregard it in the future.