Euro-Dollar Rally Has a Clear Limit, Warns UniCredit
- Written by: Gary Howes
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The Euro's rally against the U.S. dollar faces clear limitations.
Analysts at UniCredit see further upside ahead for the Euro-to-Dollar exchange rate near-term, although they set a target just short of what is widely considered to be the European Central Bank's 'line in the sand' at 1.20.
The call comes as the EUR/USD consolidates below 1.17, having earlier reversed from a year-to-date high of 1.1829, putting it near its post-1999 average level.
"The modest correction in EUR/USD also reflects the absence of new drivers on the monetary policy front, with both the ECB and the Fed expected to remain on hold this month," says Roberto Mialich, FX Strategist at UniCredit in Milan.
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This cautious central bank stance has pushed the two-month risk reversal, an indicator of option market sentiment, back to neutral levels, following a brief upswing after Middle East tensions eased.
According to Mialich, President Trump's warning that the August 01 deadline for implementing new tariffs will not be extended, alongside the announcement of a 30% tariff on EU exports, has also contributed to the softer Euro in July.
Also helping is the growing view that no U.S. recession is visible on the horizon and a more moderate Fed easing path than markets currently price in becomes possible, which will potentially cap the extent of further dollar losses.
However, analysts say that for now, a sustained reversal in EUR/USD lacks strong justification and modest further gains are still possible from here.
Above: EUR/USD uptrend remains intact.
Mialich notes that Trump's pressure on the Fed to cut rates and concerns over ballooning U.S. public debt continue to weigh on the greenback.
"We expect EUR/USD to trade around 1.19 by year-end," Mialich said, adding that levels above 1.20 remain unlikely given apparent unease about the prospect of the exchange rate crossing this 'line in the sand'.
Policy makers at the ECB have of late commented on the rising Euro, hinting that it could become an issue if it continues on its current trajectory.
Luis de Guindos, ECB Vice President, said a rise above 1.20 in the Euro to Dollar exchange rate "would be much more complicated". Until then, "we can overlook it a little bit," he added.
The comments are important because they suggest the value of the currency could start to impact ECB policy, where efforts would be made to curb the rise.
However, one influential ECB Governing Council member, Isabel Schnabel, said the strengthening Euro should not be a primary concern.
Schnabel's guidance is held in high esteem and she is considered highly influential in overall ECB outcomes, meaning investors will be taking note.
She said in a recent interview that the Euro's ongoing appreciation is, in fact, a boon to the economy, via the confidence channel. "The stronger exchange rate is also a reflection of a positive confidence effect and investors' belief that the euro area's growth potential may be higher than thought."
