Traders Anticipate Euro-Dollar Rebound
- Written by: Gary Howes
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A consistent theme we are picking up in the research inbox is a view that the dollar's recent run of strength is about to turn.
Of course, catching a falling knife is a risky prospect, but there's a building sense that the euro-to-dollar exchange rate is due to make a turn.
"The EUR/USD forecast is at an intriguing crossroads this week, with the pair hovering just below the $1.15 mark," says Fawad Razaqzada, Market Analyst at City Index. "One can’t help but feel the greenback’s run may be nearing the end."
Driving a run of successive daily gains by the dollar against the euro was last week's Federal Reserve decision and guidance that was light on commitments to follow up with another interest rate cut in December.
At the same time, some handwringing over the AI rally amongst investors has prompted a fall in stocks and associated buying of so-called safe havens such as the dollar, yen and franc.
But why would the dollar weaken from here? One argument for fading U.S. dollar strength rests on the notion that the market has moved far enough in pricing out a December rate cut.
"We believe that U.S. rates investors may be done reassessing their dovish Fed outlook for now. The latest rally in U.S. rates and thus the USD may start losing momentum," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.
Other analysts point to the relatively sound fundamentals in the Eurozone which will keep the European Central Bank on hold, while the Fed cuts interest rates further.
Analysts at Brown Brothers Harriman say "the ECB is in a good place to keep rates on hold. That limits EUR/USD downside.
Razaqzada says the euro is looking undervalued here:
"While the ECB isn’t exactly striking a hawkish pose, President Lagarde’s declaration that the central bank is “in a good place” suggests the easing cycle is effectively on pause. Combine that with improving Eurozone PMIs, a mildly upbeat GDP print, and stronger factory orders print out of Germany today and some would argue that the single currency is beginning to look undervalued at these levels against the US dollar."
Euro-dollar peaked at 1.1918 on September 17 and has steadily lost value since, reaching a low of 1.1468 today. It is guided by a descending trendline and technical analysts are on alert for a test of the big July support zone at 1.14 being tested soon.
To be sure, there is still scope for further losses, but there's a sense that downside is increasingly limited following what has been a decent multi-week correction lower.
"Technically, EUR/USD remains stuck in a well-defined bearish channel that began after peaking near 1.0920 in September. The August low at 1.1390 now represents a critical line in the sand. So long as that level holds, the pair avoids confirming a deeper downtrend," says Razaqzada.
