Euro forecasts for the near-term suggest the shared currency is likely to maintain recent dominance against the pound while testing range highs against the US dollar.
The euro has fallen back on Tuesday the 19th of January as a strong global equity rally takes shape.
For the euro risk matters, we have seen it rise strongly as markets and commodity prices are sold off. Is the euro a safe-haven? Not in the strictest sense.
With Eurozone interest rates so low a huge amount of currency has been borrowed to fund investments in higher-yielding, and therefore potentially more risky, assets.
Now that confidence is falling and volatility rises those high-yield investments are being liquidated and euros being rebought to repay the initial borrowing.
In short, global market conditions are key to why the common currency is in demand, and why it will continue to be in demand until markets return to winning ways.
The Domestic Calender: This is an Important Week
The European Central Bank is back in focus this week, representing the single most important risk factor for the shared currency.
Almost all analysts agree there is almost zero chance the ECB will announce more accommodation. But volatility could be sparked by President Mario Draghi at the press conference that follows at 13:30 GMT.
It is this belief that the ECB is likely to do nothing over coming months that has allowed market players to become more confident in betting on a stronger euro.
It is highly unlikely the governing council will opt for more easing in the wake of all the measures it introduced at the previous meeting, despite the markets disappointment.
In addition, Vice President Vitor Constancio, has been reported as saying that he preferred no change in the “foreseeable future.”
“Going back to the drawing board immediately after having delivered another layer of accommodation - even if it was received as insufficient by the market - is not going to be an appealing option for the ECB,” says a note from Bank of America Merrill Lynch Global Research.
Several analysts, however, agree Draghi may discuss the outlook for inflation with a nod to recent diving oil prices – and some price action could come from the wording of his comments. Therefore it is the words used by Draghi at the press conference that will matter most.
Keep an eye on Inflation Data
Other major announcements this weak are German and then Eurozone inflation releases (CPI). Germany's is out on Tuesday and the Eurozone's on Thursday.
German CPI was 0.3% yoy in November, and 0.2% yoy for EU-Harmonised CPI.
Eurozone CPI was -0.1% month-on-month in November, and 0.9% yoy for Core CPI.
Obviously any velocity down will hit the euro considerably as inflation is seen as the current ‘weak-link’ in the recovery.
Euro to Dollar Exchange Rate Forecast – More Uupside on the Cards
The pair continues to consolidate in a relatively tight, down-sloping range ever since the spike higher following the ECB December meeting. (For our full US dollar analysis covering the coming week please see here).
The Chaikin Money Flow Index is showing underlying strength in the consolidation which lends a bullish bias to the outlook.
I see the exchange rate eventually breaking out of the range, and unfolding in a ‘C’ leg of an A-B-C corrective pattern, which began with leg A after the December ECB meeting.
The C wave should at the very least reach the 61.8% Fibonacci extension of wave A, which indicates an expected target of 1.1260.
There are several layers of resistance in the way, however, including the 50-week MA right under it at 1.1041 and the 200-day MA only 3 points above at 1.1044.
It’s important the exchange rate decisively breaks above these levels for confirmation of the up-trend extending higher.
Such a break would probably come from a move above 1.1115, which would confirm an extension up to the aforesaid 1.1260 target.
Pound to Euro Forecast – Down She Goes
GBP/EUR appears to have reversed the previous day’s recovery and be moving back down again in the direction of the dominant short-term down-trend. (For our dedicated GBP to EUR forecast please see here).
Having broken clearly below the neckline of a large head-and-shoulders reversal pattern, which is clearly visible on the weekly chart, the pair looks set to run lower, with 1.3000 initially in focus and then 1.2615 – which is the level of the 200-week MA at 1.2615.
A break below the 1.3110 level – or the 1.3090 for a more conservative trader, would provide confirmation of a continuation down to the initial target at 1.3000.
Momentum, as measured by MACD is faithfully supporting a continuation down, in line with forecasts.