Outlook for the Euro Exchange Rate Complex Has Improved

The outlook for the euro exchange rate complex has turned decidedly bullish.

We have reported countless times of how poor the outlook for the euro remains and many analysts are forecasting the GBP/EUR above 1.44 and the EUR/USD to parity and below.

We have however recently warned there was a chance that a bottom was near in the euro's decline.

This forecast has come to fruition, albeit within a much quicker-than-expected timeframe.

At the time of writing the euro to dollar and euro to pound sterling exchange rate pairs are lower after recent tears higher.

The euro is currently stabilising around 1.15 against the dollar and 0.7330 against the pound.

The Single Currency Faces a Sunnier Future

Recent days have seen momentum shift firmly into the euro’s camp.

The EUR/USD has broken strong resistance: its 50dma standing around 1.1092, the 38.2% Fibonacci level (on December-march debasement) at 1.1265, its 200dma at 1.1328 and finally the 50% Fibonacci level lying at 1.1514.

“We expect the euro to hold ground against the dollar as the odds a September rate hike have diminished considerably amid Fed Lockhart, Federal Reserve Bank of Atlanta President, said he still expects a lift-off this year but moderated his language by adding that recent developments in China, together with the appreciation of the dollar and further decline of oil prices are clouding the US economic growth outlook,” says Arnaud Masset, Market Strategist, Swissquote Bank.

While the Eurozone economy certainly is improving it would appear that recent strength in the EUR is more of a function of GBP and USD weakness than anything else.

Latest Pound/Euro Exchange Rates

	Live: 1.1448▲ + 0.04% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1059 - 1.1105
**Independent Specialist	1.1288 - 1.1334 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Investors are taking into account the latest available information and it appears that a rate hike in 2015 is not even guaranteed anymore.

With the Fed likely to be on hold the same will be true for the Bank of England which tends to only start raising interest rates once the Fed has made the initial move.

From a longer term perspective, EUR/USD broke yesterday beyond the 1.1534 resistance (Post-ECB QE top).

“This level was/is an important reference for our LT term EUR/USD short bias, which is now seriously questioned,” says Piet Lammens at KBC Markets.

The rebound in EUR/USD is in the first place driven by global market factors (risk-off sentiment) rather than fundamental economic news from the US or from Europe.

“We think that the economic context hasn’t changed in such a way that the prospects for monetary policy in the US and in Europe call for a big change in fortunes in favour of the euro and against the dollar,” says Lammens.

That said, the risk-off logic can still continue for a while.

“So, we don’t row against the tide. A topping out process in EUR/JPY might help to cap/slow the upside in EUR/USD too, even in case of more risk-off behaviour. However, this is nothing more than a hypothesis at this stage,” says Lammens.

After Black Monday on the global financial markets, we saw a ‘Better Tuesday’.

"Investor sentiment improved and Monday’s moves partially reversed with equity markets outside of China recovering, while the yen and Treasuries headed lower as safe haven support eased. The EUR/USD fell back following the sharp rise seen at the start of the week. Commodities and EM currencies also firmed," notes Arjen van Dijkhuizen at ABN Amro.

The outlook for the euro and global currencies in general remains with monetary policy in the US.

The timing of the first interest rate in the upcoming cycle remains uncertain.

Later today, New York Fed president Dudley’s, who is a current voter on the FOMC, speaks at an event (15:00 BST) should provide some insight into his views on how much caution is warranted in tightening policy, given recent events in China.

Concerning the euro's chances against the pound sterling, yesterday’s price action in sterling was a bit erratic.

"Even so, we have the impression that the topside in EUR/GBP is growing better protected, with important resistance in the 0.7483/0.75 area. Interest rate differentials between the euro and sterling are still substantial and in favour of the UK currency. A cautious sell-on-upticks approach can be considered," notes Piet Lammens at KBC Markets.

Markets Latest: Euro Excitement Fades for Now

The past 24 hours have seen disappointment for the euro after it strengthened so much across the board on Monday.

“A natural sell-off of euros took place in the morning, as investors felt the single currency had been over bought during Monday’s drama,” notes Carl Hasty at Smart Currency Business.

With the US markets capitulating at the final hurdle last night, and more volatility in the Chinese markets this morning, the European indices opened at a loss this Wednesday.

Another yuan devaluation meanwhile saw the currency hit a 4 year low, and continued the People’s Bank of China’s scattershot approach to providing aid for its slowing economy and erratic stock market.

Meanwhile Its last move, the PBOC rate cut, was as insufficient as many expected, even if it did arguably prevent a third day of complete collapse for the Chinese markets.

Global Picture: US open could see clouds Chinese clouds disperse

There was to be no real change to the trading landscape as the morning went on, with the European indices resolute in continuing their China-inspired declines.

However, the indices are away from their session lows, partially helped by the news that the People’s Bank of China was preparing to inject another 140 billion yuan into the country’s financial sector, following the 120 billion yuan bundle last week.

Whilst it may be a case of the central bank using a pack of plasters when surgery is needed, investors appeared to react more positively to the news than they have done to other inventions by the PBOC in the past fortnight. It means the FTSE has tentatively climbed past the 6000 mark, with the DAX sporadically re-crossing the 10000 level.