Natixis Eye Further EUR/USD Upside

© Christian Müller, Adobe Stock

- The Euro remains resilient despite negative news flow.

- This is potentially a sign of longer-term strength.

- A break above 1.1624 is pivotal for the trend.

The Euro is trading resiliently against the U.S. Dollar despite a duo of political headwinds, and technical analysts say this is likely to remain the case over coming days.

The ability to dismiss bad news is often a sign of strong underlying investor confidence in an asset. But Angela Merkel's grip on power weakened after her CSU party allies saw their share of the vote in Bavaria fall substantially at the weekend.

This is while the Italian government blatantly disregarded EU rules Monday by proposing an increased budget deficit of 2.4% for 2019, which falls only to 2.1% in 2020 and 1.8% by 2021. 

Yet neither story has really ruffled the EUR/USD rate.

"The election has had little impact on the EUR today but suggests that the unsettled backdrop for German (and broader European) politics will remain on the market’s radar," says Shaun Osborne, chief FX strategist at Scotiabank.

The ZEW sentiment index, an important forward looking indicator of activity in the Eurozone economy, also came out lower than expected for September on Tuesday. It fell to -19.4 for September, down from -7.2 in August, which was a much steeper fall than consensus for a decline to -9.2 had suggested was likely.

The Euro disregarded the ZEW and rose to highs of 1.1620 during the Tuesday session, possibly due to the concurrent release of trade balance data, which analysts interpreted as positive. 

"Eurozone exports increased 2.1% month-on-month on a seasonally adjusted basis in August, after a decline of 1% in July," said Bert Colijn, senior economist for the Eurozone at ING Group. "While eurozone businesses have seen confidence falter over trade tensions in recent months, it is difficult to find hard evidence for the specific effect of the trade war on actual exports data."

Above: Euro-to-Dollar rate shown at Daily intervals.

Technical analysts say there is more upside in the cards for EUR/USD, with the currency team at Natixis forecasting the pair will rise back up to September's 1.1800 high over time.

"Daily indicators have turned bullish once again, while the weekly stochastic is also turning upwards, pointing to a reduction in selling pressures in the short term," says Micaella Feldstein, a technical analyst at Natixis.

Under these circumstances the odds of a pull-back to support in the 1.1454-70 range are now considerably reduced.

Feldstein says the 1.1610-23 ceiling of tough resistance on the chart is key in that, if the pair can break above this level, a more upbeat outlook would then be envisaged.

"A breakout above these levels would invalidate the downtrend in the daily chart, releasing significant upside potential towards the resistance levels around 1.17-1.1708 (monthly Bollinger moving average) and, especially, the ones around 1.18-1.1807 (upper band of daily Bollinger and descending resistance trendline)," Feldstein writes, in a note to clients.

Analysts at Thomson Reuters highlight 1.1624 as a key rubicon-like threshold, with a break above confirming more "chop" in the 1.15-1.18 range.

The 1.1624 level is important because it is the 50% retracement level, or midpoint, of the 1.1815 to 1.1433 previous fall in September.

Heavy Euro buying, potentially by central banks, at the recent 1.14 lows indicated the exchange rate may have put in a significant low according to Derek Halpenny, European head of research at MUFG.

Longer term charts also suggest the pair may be destined for higher levels after forming a hammer candlestick pattern on the 50-month moving average in August. This and the pivot swing higher in September suggests the pair will trade with a bullish bias over the longer term.

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