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A drop in US bond yields has lifted the single currency off its lows, and analysts at a Belgian bank see limited room for further gains while French risks linger.
The euro has recovered above 1.12 against the dollar as US Treasury yields fell, though analysts at KBC Bank see the rebound running short of fuel.
US yields drive the pair: higher US yields pull capital into dollar assets, and their fall since Wednesday's inflation surprise removes the force that took the euro to a 17-month low of 1.1113.
"The sharper US yield drop weighed on the dollar. EUR/USD recovered to north of 1.12 with minor follow-up gains this morning. We see little further upside potential for the common currency with the French theme slumbering in the background," says KBC Bank's morning note.
The ten-year Treasury yield has eased to around 5.09% from 5.33% after the CPI release, as haven demand from a sell-off in technology stocks flowed into US bonds.
The Euro to Dollar rate trades at 1.1234 today, 0.5% below its 21-day moving average at 1.1293:
Above: EUR/USD at daily intervals with the 21-day moving average and RSI.
UniCredit's FX strategist Roberto Mialich says the euro has room to breathe if US yields retreat towards 5.00%, with French public finances the barrier to anything more.
"Re-approaching or even exceeding 1.14 has probably become a difficult task at this point," he says.
The euro's own rate support also looks stretched, with markets pricing three more European Central Bank hikes against Commonwealth Bank of Australia's call for one final move in December.
"Despite its latest consolidation, the EUR should remain vulnerable to any potential return of sovereign credit risks," says Credit Agricole in its weekly FX outlook.
The Fed Offers No Push
Fed Chair Kevin Warsh gave no guidance on the 28 October policy meeting at an IMF event on Friday, and markets now see an 85% chance of no change.
"We're not in that business anymore," Warsh said of forward guidance.
Credit Agricole's analysts argue the dollar's rate advantage has stopped growing, and its positioning model is long EUR/USD with a target of 1.1651.
"We doubt that the USD would benefit significantly from further improvement of its relative rate advantage over the rest of G10," says Credit Agricole.
The bank's fundamental call is more cautious, with EUR/USD forecast at 1.13 in three months.
The Levels
KBC sees sterling extending gains against the euro, with a weekly close below 0.8455 in EUR/GBP an important technical signal, equivalent to GBP/EUR above 1.1827.
UOB's technical analysts expect EUR/USD to range-trade between 1.1160 and 1.1280 over the coming one to three weeks.
The 1.1280 ceiling sits just below the 21-day average at 1.1293, so the bounce has nearly closed the gap PSL's modelling flagged at the lows.
A daily close above 1.1293 would test KBC's call; until then, the range floor at 1.1160 is the next stop.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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