Euro-Dollar: Early-week Relief Unlikely to Extend

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The euro starts the new week with a bid against the dollar, but global risks point to another challenging week ahead.

Euro-dollar rises to 1.1444 in Monday trade amidst a broader USD decline, even as another day of hostilities is promised along the Persian Gulf.

The euro fell 0.80% on Friday alone, making Monday's 0.25% advance a minor retracement of recent losses. The pair fell to the cusp of 1.14 last week before finding some buying interest, confirming the level has some support credentials, as proved the last time the market was down here in July of last year.

"EUR/USD has found support at last summer's low near 1.1390/1400," says Chris Turner, head of FX analysis at ING Bank. "Some consolidation may be due after a quick 3% drop over the last fortnight."

Last summer, when euro-dollar fell just below 1.14, it promptly roared back to 1.16 with a 1.50% daily gain; a show of resilience that was in keeping with a buy-on-dips mentality.

Fast forward to today, and that mentality is distinctly absent, which is why we think further weakness is possible in the coming days.

"Another leg higher in energy could see EUR/USD still extend to the 1.12/13 area given the overhang of net euro long positioning," says Turner.

Looking at a multi-month timeframe, ING thinks that EUR/USD will start to move higher once oil supplies start to flow again.

This doesn't look to be the week in which oil starts flowing through the Gulf's Strait of Hormuz, with U.S. President Donald Trump attempting to cajole numerous nations to send maritime assets to help defend shipping transit from Iranian attacks.

There's been less than a lukewarm response by the time of writing Monday.

The problem for Trump is that Iran knows that the Strait is its only real source of leverage and it can damage civilian shipping with relatively basic hardware.

Trump might realise that he will have to escalate the war in order to completely eliminate Iran's hold on the Strait if he is to be able to claim anything resembling a victory.

This means a continuation of USD-supportive conditions that will keep euro-dollar rallies limited and downside risks elevated.

Central banks are in action this week - 21 of them to be exact - including the Federal Reserve and European Central Bank.

Both are to strike a more 'hawkish' tone in light of fears the energy price spike caused by the Iran conflict will raise inflation in the U.S. and Eurozone.

The way to approach these events is to realise that there's probably not going to be much divergent policy travel in light of similar global headwinds facing both central banks.

That means any post-Fed or post-ECB action should be faded on the day.