Euro-to-Dollar: Beware Budding USD Strength
- Written by: Gary Howes
Image © Adobe Images
The Euro to Dollar exchange rate (EUR/USD) is stuck on 1.1660, but looks vulnerable to a test of lower levels.
The Euro has not fully recovered from Tuesday's fall and this leaves us wary of building strength in the Dollar.
A global bond market rout proved rich pickings for USD bargain hunters and the EUR/USD dropped down to 1.1609 as a result, but soon found some solid support in the form of the 50% fibonacci retracement level of the July drop.
As the chart shows, the Fibonacci retracement of that July move is providing a solid technical grounding that allows us to make sense of mid-year price action in EUR/USD.
It shows a strong tendency for the pair to oscillate around 1.1609, the 61.8% fib level, with tramlines provided by the 78.6% (1.1735) and 50% fib levels providing the outer bounds of the range.
From a technical perspective, the implication is that the range will be respected from here, but we cannot ignore recent developments that suggest we are entering a fundamentally more supportive environment for the Dollar amidst rising global market volatility.
"We have argued that further USD weakness is likely capped for now unless the 1y1y rate can truly move lower, or alternatively, unless the newsflow concerning the Fed composition evolves materially in coming days upset markets," says Shahab Jalinoos, Strategist at UBS.
UBS expects global FX volatility to rest elsewhere (UK bond angst, French elections, Japanese political uncertainty), which is traditionally negative for external currencies and supportive of the USD.
Dollar buyers could consider locking a portion of their payment exposure at current rates given building downside risks while leaving some funds free to take advantage of any EUR/USD upside surprises.
When market volatility is exclusively centred on the U.S. economy and domestic agenda (tariffs, Fed), the U.S. Dollar tends to struggle, as was the case in H1.
For now though, much of the U.S.-specific negative news is in the price of the Greenback, with investor interest turning to ex-U.S., making the Dollar more attractive.
"It has been a tumultuous start to September, with bond yields and gold catching the market’s attention. Unsurprisingly, European and Japanese long-end government bond yields rose to multi-year highs, reminding investors of the impact of a looser fiscal stance and the rising inflation threat, largely due to tariffs gradually becoming the norm," says Achilleas Georgolopoulos, Senior Market Analyst at XM.com.
Near-term attention now turns to ISM services PMI data due Thursday, but it will be Friday's non-farm payroll release that sets the tone into the weekend and next week.
The market is looking for around 74K jobs to have been added in August, with volatility in FX resulting from a deviation from this figure.
However, the risks aren't two-way into the release as markets have already set quite a low bar for the outcome, helped by Wednesday's below-expectation JOLTs figure, meaning the real surprise would be on an above-consensus reading.
"Bigger moves on USD will likely be caused by an upside surprise on the numbers and if so, then stronger USD," says Thanim Islam, Head of FX Analysis at Equals Money.
