Will that seemingly never-ending range in the euro v dollar exchange rate break? We consider the evidence concerning the outlook and believe it favours the euro.
The euro to dollar exchange rate has moved higher and is back above 1.09 in early February.
The move is however a continuation of what appears to be an incredibly reliable sideways move defined by 1.10 on the upside and 1.08 to the bottom.
“Subsiding interest rate speculation in the US and expectations of further monetary easing by the ECB are keeping the currency pair in check. Accordingly, the consolidation continues with neutral technical indicators. Our favoured trading range: 1.0810 - 1.1000,” says Ralf Umlauf at Helaba Research.
According to Axel Rudolph at Commerzbank the intraday Elliott counts are suggest another upside attempt but this should not extend beyond 1.1000/60.
“Above the market lies tough resistance at 1.1000/1.1060. These are the recent highs and the 200 day ma, the 2014-2016 downtrend and 55 week ma and we view the market as bearish while capped here. Our target remains the 1.0523 recent low,” says Rudolph.
The sideways range-trade remains favoured at present but we are increasingly of the opinion that the break to the range will be to the topside.
Eurozone Economy Improving
Better-than-expected unemployment data from the eurozone this morning will come as a breath of fresh air for European Central Bank policy makers.
Positive data prints like we have seen this morning, with a reduction in unemployment levels to 10.4% for December, and the lowest level since September 2011.
This is just the latest development in the Eurozone economy which continues to improve, and at current rates of improvement, the ECB may not have cut rates any further.
US Economy Slowing
Any move higher in the euro to dollar exchange rate will however be a function of US dollar weakness as opposed to euro strength in our opinion.
A weak set of manufacturing data out of the US on the first of February resulted in some aggressive USD selling, confirming markets are starting to buy into the lower USD story.
Manufacturing contracted in January as the PMI® registered 48.2 percent, an increase of 0.2 percentage point from the seasonally adjusted December reading of 48 percent, indicating contraction in manufacturing for the fourth consecutive month.
A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
This is hitting expectations for future interest rate moves at the US Federal Reserve.
“Interest rate speculation in the US is declining and a hike in March has been more or less priced out. This is in response to comments from various Fed officials, who have drawn attention to the fact that the global economic risks and turmoil on the financial markets have to be taken into account. The pace of rate hikes could slow a little, according to the officials,” says Helaba's Umlauf.
US Economy in a Soft Patch
US economic growth has been slowing over the past couple of quarters. Indeed, the economy seems to be in a soft patch.
The advance estimate of Q4 GDP came in at 0.7%. Most major components were weak, particularly the contribution of fixed investment continued to decline.
“On top of this the sharp drop of December’s orders and shipments of durable goods suggest that this weakness could continue in the coming months, as a result of the collapse in oil prices and the stronger US dollar,” says Maritza Cabezas Senior Economist at ABN Amro.
ABN Amro say they see some downside risks to their Q1 GDP growth forecasts.
“We think that the low oil prices at the beginning of this year and the instability in financial markets, which resulted in a sell-off in the US equity market will impact financial conditions in the US,” says Cabezas.
If oil prices remain low and the US dollar continues to appreciate at a similar pace as in 2015, this could put further downward pressure on manufacturing and energy related activities.
2016 Could be Bad for the US Dollar
We reported last year that HSBC were forecasting 2016 to be a softer year for the US dollar based on the potential for a shift in tone on US interest rate rises.
“If at any time next year the market thinks the Fed may need to loosen in 2017, then the USD will plummet," HSBC’s David Bloom wrote, "the risk/reward in 2016 is for a weaker USD. Fed rate hikes are in the price.”
The forecast was an outlier as many institutional forecasters were calling the US dollar higher and for the euro to dollar conversion to slump to parity.
If HSBC are right then we could well see a higher euro to dollar rate, the bank are forecasting 1.20 for the year end.
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