Euro-to-Dollar Rate to Hit 1.20+ if Sentiment and Political Risk in Euro-Area Continue to Improve

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The Euro will probably push its advantage against a Dollar weakened by recent inflation scepticism over the near-term, especially if German political risk eases and Europe stays confident.

The Euro is expected to continue rising versus the Dollar, eventually reaching 1.2000, according to Frankfurt-based Helaba Research.

The pair is expected to push higher as long as sentiment in the Eurozone continues to improve, says the research company

The release of the German Business Sentiment IFO survey this morning has shown an uptick in confidence in two of its three components - the forward-looking 'Expectations' and the 'Business Climate Index'.

The Euro-to-US Dollar has been stuck under tough chart resistance at 1.1860-80, according to Helaba, but a successful break above those levels would probably see it move higher to the aforesaid target.

Others agree.

"EURUSD needs to break above the 1.1865/1.1900 resistance zone to open upside potential to 1.23/25. Importantly, conditions for such a bullish break are in place," says Hans W. Redeker at Morgan Stanley.

The conditions cited by Redeker are the Eurozone November PMIs released this week where data jumped higher, with readings coming in much stronger than anticipated. The services reading jumped to 56.2from 55.0 and the manufacturing PMI to 60.0 from 58.5, leaving the composite at 57.5,up from 56.0 in October.

EUR/USD has also been helped higher by a weakening Dollar, due to recent comments from the Federal Reserve chair Janet Yellen and her colleagues on the FOMC (Federal Open Market Committee) that stubbornly low inflation may be due to more endemic structural factors which could persist, rather than transitory factors as previously thought.

This has dampened the inflation outlook and means the Fed is less likely to up interest rates as much as before.

The Dollar is highly correlated to the base interest rate set by the Fed as it impacts on inflows of foreign capital, with higher rates generally attracting greater inflows because of the higher returns.

Société Générale's Kit Juckes argues that a further boost to the Euro could come from a conclusion of the political uncertainty in Germany if Angela Merkel accepts the SPD leader Martin Schulz's lifeline and forms a grand coalition with him.

Such a coalition would give her a sizeable working majority and ensure a pro-European government was sitting in the Bundestag.

"A positive outcome, reducing uncertainty and coming in the wake of yesterday's strong PMI data, might be enough to take EUR/USD through 1.1880," Says  Société Générale Head of G10 FX Kit Juckes.

Although he cautions that upside could be a slog due to an imbalance from so many already-existing Euro-positive bets or 'longs'.

An imbalance of too many longs usually means the market is at risk of doing the opposite thing and going south, according to research.

Recent CFTC data, which shows investor positioning in currency derivatives on US futures exchanges, "still suggest there's a lot of stale Euro longs to battle through," said Juckes.