Euro to Dollar Exchange Rate Likely to Struggle Above 1.13 as Wall of Selling Interest Looms

The euro to dollar exchange rate has powered ahead with analysts advocating that yet further gains are possible.

While the euro could well continue to benefit from a wounded US dollar, and signs that the ECB could abandon targeting a weaker exchange rate altogether, the EUR to USD rate could struggle to advance above 1.13 based on the underlying dynamics of the FX market.

Underlying market structuring has shown time and again that the sheer wall of selling interest above 1.13 is likely to persist, and for that reason we would expect gains to be hampered.

“EUR/USD is through the seven month resistance line at 1.1308 and is approaching the February high at 1.1377, we look for the market to now struggle,” says Karen Jones at Commerzbank.

Jones notes the 13 count on the 240 minute chart and if not already done so “we would tighten stops on longs/exit.”

“Above here lie the September and October highs at 1.1460/95. Minor support lies at 1.1218 ahead of support at 1.1060, the December high, this guards the bottom of the range at 1.0808,” says Jones.

US Dollar Could now be Oversold

There are also signs that the USD's decline against the euro may be over-extended following the break-neck pace in the recent ascent of EUR/USD.

The dollar's decline as markets get the sense that the US Federal Reserve is reluctant to raise interest rates more than twice in 2016 suggesting currency inflows into the United States will not be as strong as initially anticipated by traders.

Nevertheless, the declines in the dollar, and downgraded interest rate forecasts, fly in the face of consistently strong data.

“Despite the somewhat dovish Yellen rhetoric the US economic surprise index has been on something of a tear since early February; we are now near November’s cyclical highs,” says Jeremy Stretch at CIBC in London.

“This suggests to our minds that the post Fed USD move, including in front end spreads  is overdone. Hence we maintain a bias towards a USD rebound into Q2,” says Stretch.

Stretch is focused on the US dollar index (DXY), whose single largest component is the euro, and he believes there to be value in the DXY down around the 94.70 area.

“We continue to view the USD sell-off as overdone. Hence this favours a medium run rally back towards early month highs at around 98.50,” says the analyst.

Nevertheless, the CIBC analyst concedes he would be unsurprised should the DXY head back towards 96 into the close of the week.

ECB Could Surprise Again

Markets have also spurred the euro higher on indications the ECB is abandoning plans to chase the euro lower to boost Eurozone inflation and economic growth.

At the press conference following the March 10 policy decision markets latched onto the suggestion that chasing ever-lower rates was ultimately futile.

We have since however had the ECB Chief Economist, Peter Praet remind the market that the ECB have yet to reach ‘the physical lower bound’ in terms of rates.

“With medium run inflation expectations once again heading lower in recent sessions such a statement is designed to remind investors that the ECB are not prepared to tolerate an aggressive EUR appreciation,” says Stretch.