EUR advances on broad-based USD weakness

The Euro (Currency:EUR) is taking advantages of broad-based US dollar weakness on Monday afternoon in London. Heavy profit taking in the USD-JPY rate is seen as being key to today's USD woes.

The only way is down

"We remain bearish on EUR/USD given our view on the relative monetary policy outlook between the Fed and the ECB. Our below-consensus forecast for flash PMIs and German IFO this week and the resurgence of political uncertainty in peripheral countries (ie, Italy, Spain, and Portugal) will also likely weigh on the EUR," says a weekly currency forecast note issued by Barclays.

Agreeing with the observation that the euro is unlikely to enjoy much more of an advance against the US dollar is Shaun Osborne at TD Securities who says:

"For the EUR, the broad pressure on the USD has lifted EUR-USD close to the July high just above 1.32, but we don’t see much scope for an extension higher.  Eurozone survey data will be the fundamental focus this week (PMI’s on Wednesday and German IFO on Thursday) and while there may some upside risks to the German figures, we continue to remain overall bearish on the single currency.  We would reconsider with a decisive break above 1.32."

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The key question last week was whether the euro dollar exchange rate was on course for renewed strength or whether the market was stuck in a sideways range.

The answer appears to be the latter.

"The weekly chart goes some way to mitigating the positive signals noted on the daily chart. Firstly, the huge rally last week has not seen any follow through interest; in fact, this week’s session is very likely to form an inside range session," says Osborne.

The TD Securities analyst says that no follow through buying after what was a hugely bullish price signal last week has to be a concern for the EUR bulls.

"Weekly momentum remains slack, suggesting range trading will continue more broadly. Weekly charts suggest that a retest of 1.30 is a bit more likely than a push on the 1.32 at this point," says Osborne.

Euro dollar exchange rate to be driven by USD side of the equation

Analyst Piet Lammens at KBC Markets says he expects the next move in EUR/USD will still be driven by the US side of the story and US eco data as this will decide on the timing of the start of a scaling back in the Fed bond buying.

Will today's US eco data be of importance?

Not necessarily says Lammens who sees holiday-thinned market conditions as being problematic: "investors will probably wait for next week’s key early month data to adapt positions. So, more technically inspired trading might be on the cards short-term. The political developments in Portugal remain a wildcard for EUR/USD trading. However, for now, the impact on global markets remains limited.

"Any further gains of the dollar will have to come from strong US eco-data which will decide on the timing and the pace of the reduction of bond buying. In the absence of such news, the major dollar cross rates might enter a consolidation pattern.