Euro Targets Fresh Highs Against Pound and Dollar
- Written by: Gary Howes
The euro exchange rate complex is forecast to strengthen further BUT key resistance against the pound looms while Thursday could be a game-changer for global FX.
The euro to pound sterling exchange rate (GBPEUR) is seen trading at 0.7345 as positive momentum behind the shared currency continues to eat into the UK currency.
The euro appears to have carved a base for itself at 0.70 and is attempting a comeback off this support zone - could the worst now be behind the euro?
"We are watching EURGBP as it is trading at the top of its recent 0.7250-0.7415 trading range. A break of 0.7365 area should see a test of the range highs, with 0.7470-.7520 key long-term resistance above. 0.7320/00 is pivot support ahead of the range lows," say Lloyds Bank Research in a currency forecast note to clients.
The EURGBP is now trading above the 20, 50 and 100 day moving averages; a sign that advocates for further gains from here based on positive momentum.
Resistance at 0.74 is however significant and having thwarted euro strength on roughly 8 occasions in 2015 the euro faces a tough challenge if it is to deliver better exchange rates.
Note that for the euro v pound sterling pair it is the British pound which appears to be in the driving seat with markets patiently waiting for the Bank of England to start raising interest rates.
"We look for dips lower to be contained by the uptrend at .7211 and while it holds, an upside bias will remain intact," says Karen Jones, a technical analyst with Commerzbank.
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.
"The market has recently failed at the top of a 6 month channel (.7406) and will need to clear the .7421 recent high to retarget the .7482 May high ahead of the .7468 55 week ma. We suspect from a longer term point of view that the market will fail in this vicinity," says Jones.
Euro to Dollar Exchange Rate: US Fed Should Inspire Volatility
The euro dollar exchange rate (EURUSD) meanwhile trades in familiar ranges above 1.10 and below 1.14.
At the time of writing the exchange rate is at 1.1334 – towards the upper end of the 2015 range and still some way off the parity level that many have been betting on in 2015.
According to Karen Jones at Commerzbank in London, the euro dollar exchange rate remains upside corrective:
"EUR/USD remains upside corrective near term and will remain so while above the 55 day ma at 1.1102. The intraday Elliott wave count has turned more positive – the move above 1.1332, the 1st September high suggests gains to the 1.1468 May high and currently the Elliott wave count is suggesting potential to 1.1500.
"We suspect dips lower will find initial support at 1.1255, but only below the 55 day ma at 1.1099 would trigger a slide to the base of the cloud circa 1.0996 and the base of the channel at 1.0921."
The euro has now erased its ECB-inspired losses seen earlier in the month.
However, a daunting week looms when the spotlight will shine on the decision at the US Fed on whether or not to raise interest rates.
While much has been made of the prospect of interest rate hikes we get the sense that the most likely outcome will be no change with the always lingering promise to cut rates in coming months.
Essentially this is the status quo scenario for the euro / dollar rate which would see a continuation of the trade between 1.10 and 1.14.
“We expect the Fed to keep rates unchanged and to signal its intention to start hiking this year. This outcome is broadly priced in, so we expect only limited pressure on the US curve. Additional headwinds for USTs might result from the PBoC’s ongoing FX intervention,” confirm TD Securities in a note to clients.
TD’s expectation is for the Fed to err on the side of caution and take a pass on raising rates at the September meeting, as the risk that recent market volatility and the deterioration in financial conditions will curtail the outlook for growth and inflation is too big to ignore.
The consensus expectation, however, is for a 'dovish hike.'
The market remains unconvinced, assigning 30% odds of a hike.
However, even if the Fed does not move on rates they are likely to maintain a hawkish bias.
Should we get an indication that the Federal Reserve is moving closer to a rate hike, we would expect to see the dollar strengthen.
On the other hand, if the central banks signals intentions to keep its rates at rock-bottom in the short-to-medium term, we could see the dollar weaken against currencies like sterling.
The most important factor in guiding the Fed’s decision this week will be the fallout of the Chinese slowdown on US and global growth. Sunday’s data releases in China (industrial output) disappointed, and in the short term China will continue to provide the main market theme.
Economic data has been more than supportive, but some measures of inflation expectations are now flirting with their lowest levels since the financial crisis and expected financial market volatility is now unusually high.
Neither of these are conditions that have historically supported a rising policy rate.
“We still believe the Fed is likely to raise rates before the end of the year. While the Fed is now shying away from explicit forward guidance about the timing of future policy decisions, it should at least leave the door clearly open to tightening later in the year, thus constituting a “hawkish pause” rather than a “dovish pause,” says a note on the matter from RBC Capital Markets.
Yesterday, US bond yields rose quite sharply in the run-up to the FOMC meeting.
However, the gains of the dollar were moderate, to say the least. Today, the focus is on the US CPI. Will a strong CPI help the dollar? In the UK, the labour market data might move sterling, too.
