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The single currency is oversold and has lost a key headwind, says a German lender's latest research.
The euro is oversold after its slide against the dollar and pound, and the conditions for a recovery phase are now in place, according to Helaba, the Frankfurt-based bank.
For the Pound to Euro exchange rate, a euro recovery means a pause in a rally that delivered the best level for euro buyers in a year this week.
"The euro remains battered given the fragile situation in the European bond market. The trend is also pointing lower, while the US yield advantage over the eurozone has recently melted away," says Helaba's daily research note.
Helaba says this means the yield gap should no longer add pressure on the euro.
"In addition, the oversold market condition should be remembered, which makes a recovery phase possible," says the note.
ABN AMRO this week said the worst of the euro's decline has passed.
French Bonds Stop Getting Worse for the Euro
The euro's weakness traces back to France, where the gap between French and German ten-year borrowing costs, the favoured measure of French stress, sits near 140 basis points, a level Helaba calls very high by historical standards.
French ten-year yields touched 4.97% on Thursday before retreating, and the spread over German Bunds finished the day no wider.
Helaba notes no further widening in eurozone bond spreads, removing the force that drove the euro to its weakest level against the pound in a year.
Above: EUR/USD daily with oversold signals in the RSI (lower panel).
That matches yesterday's analysis, which found further gains in the Pound to Euro rate depend on fresh French stress, with the Paris political calendar offering no immediate trigger.
The French government faces a no-confidence motion over its budget, which it survives if either the Socialists or the National Rally abstains, according to Danske Bank.
Rates and Oil Ease the Pressure
Expectations for further interest rate hikes eased slightly this week, says Helaba, with an additional European Central Bank (ECB) hike by year-end not fully priced while markets still see a further Federal Reserve move as possible.
Energy prices rose on reports of a possible US strike on Iran and a hurricane in the Gulf of Mexico, before easing after President Donald Trump ruled out an attack ahead of November's midterm elections.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
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Talk to a specialistBrent crude futures trade near $90 a barrel, and lower oil prices take pressure off the euro given the eurozone's reliance on imported energy.
ECB Executive Board members Piero Cipollone and Isabel Schnabel speak today, offering the next steer on whether a year-end hike returns to market pricing.
EUR/USD and GBP/EUR Levels
Today, the Euro to Dollar rate is at 1.1220 and the Pound to Euro rate is at 1.1792.
Helaba's levels for EUR/USD:
• Resistance at 1.1260
• Resistance at the retracement level of 1.1348
• Support at 1.1160, the recently marked year low
In Pound to Euro terms, a euro recovery fits the consolidation PSL's modelling already flags, with the pair stretched 0.8% above its 21-day moving average and repeated pushes above 1.18 sold this week.
A consolidation would first target 1.1750, last week's breakout level, ahead of 1.17 and the 21-day average near 1.1690.
Our house view is that the pound stays capped into the 28 October Budget and recovers afterwards, which favours buying any dip towards the 21-day average.
A break above 1.1260 in EUR/USD would confirm Helaba's recovery is under way, and would put 1.1750 in GBP/EUR within reach.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
One specialist explains every step in plain English and stays with it until the money lands. FCA authorised, FRN 594433.
Talk to a specialist
