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Euro-to-Dollar Rate Bears Throw in Towel, Eye Gains in Month-end Boon for Europe's Single Currency

- EUR breaks range, tops 200-day average and its 55-week average.
- Market dumps USD, celebrates Next Generation virus recovery fund. 
- Offering glimpse of breather from political risks looming over the EUR.
- HSBC upgrades forecast, Nomura turns "long" as BMO also offers bid.

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  • EUR/USD spot at time of writing: 1.1097
  • Bank transfer rates (indicative): 1.0710-1.0787
  • FX specialist rates (indicative): 1.0932-1.0998 >> More information

The Euro-to-Dollar rate rose in the final session of the week, making for five back-to-back days of gains that may have been aided in final hours as a collection of voices and participants threw in the towel on bearish forecasts and wagers against the single currency.

Europe's unified unit has risen against a flagging Dollar for five days on the bounce as the market fell out of love with the greenback and after the European Commission raised France and Germany by €250bn with its proposal for a €750bn coronavirus recovery fund.

Billed as a Next Generation fund, European Commission President Ursula Von der Leyen's proposal will bolster the EU budget through bond issuance and sufficiently enough for it to dole out grants and loans to member states as they seek to pull themselves out of the coronavirus trough.

"This is clearly a EUR positive development and we have decided to lift our year-end EUR-USD forecast back to 1.10, where it was just a month ago. Our earlier forecast change lower, to 1.05, was predicated on a potential increase in worries about debt sustainability across the Eurozone and the associated rise in market fears about break-up. Assuming this proposal passes through the necessary steps, then these worries seem less likely to materialise and this requires a shift on our part," says Dominic Bunning, a strategist at HSBC

Above: Euro-to-Dollar rate at daily intervals with 200-day moving average. Relative strength index (RSI) in lower pane.

Wednesday's proposal followed weeks of uncertainty over whether European leaders would ever manage to act at all given that national governments including those in Europe took action in March and April to support shut-down economies while a fractious debate over 'Euro bonds' stymied collective action. 

Europe acknowledged that it missed a boat when it began talking about a recovery fund rather than action to limit damage done by the virus and the now-proposed response does still need to secure the unanimous endorsement of leaders in the European Council. 

That approval might not be forthcoming but the Euro-to-Dollar rate and a collection of bearish voices have taken heart from the fact that there could be scope for compromise between the various competing national positions and interests, with leaders actually working toward this end.

"Several factors were suggesting EUR outperformance could materialise (EA Banks recovering, EA outperforming US stocks, 1s3s box steepening). But we needed to see EUR finally break out of its monotonous range before we wanted to trade it. On the break higher of 1.1050 that was it for us. From here on, the break of 1.1078 is leading to short EURUSD positions amongst CTAs being reduced, and EUR now breaking above 1.11 too is helping that," says Jordan Rochester, a strategist at Nomura

Above: EUR/USD at weekly intervals wiith 55-week (red) and 200-week moving-averages. Relative strength index (RSI).

Rochester was a seller of the Euro but, with one eye on Eurozone stock markets that are outperforming their U.S. counterparts, he noted earlier this week that a Euro-to-Dollar rate rally above 1.1050 would put the stop-loss on a 'short' Euro trade in danger. He and the Nomura team also said that a break above there would put a decisive end to the narrow 1.08-1.10 range that's gripped the exchange rate for months and that this itself could lead to fresh Euro buying. 

The Euro was on course for a close above its 55-week moving-average at 1.1064 Friday, a level it hasn't traded above since early 2018 when the U.S.-China trade war first broke out, except briefly when the coronavirus-related collapse of emerging markets lifted the Euro by 6% between March and April.

Nomura is now betting on an increase in the Euro-to-Dollar rate from Friday's 1.11 level to around 1.13, although neither Nomura nor HSBC are alone in stepping back from bearish expectations of the single currency. BMO Capital Markets also said Friday that recent price action is indicative of a market that's looking to "buy the dip" amid improving risk appetite, although the bank sees more upside for the Euro against some emerging market currencies. 

"We are a bit more concerned about the prospect for EUR strength; but on non-EURUSD axes. Given the clear signs of rising geopolitical tension, we think now is an opportune time to be exploring long-EUR hedges as an offset to the downside factors facing riskier assets (like equities and some EM currencies). In particular, currency pairs like EURTRY and EURZAR stand out, since each contains a "vulnerable EM"," says Stephen Gallo, European head of FX strategy at BMO. "We would look to buy EURTRY...We don't view this as a break-out trade as much as we view it as a means of portfolio insurance."

Above: EUR/TRY at weekly intervals wiith 55-week (red) and 200-week moving-averages. Relative strength index (RSI).

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