Euro to Dollar Exchange Rate: EUR/USD Could 'Relocate Significantly' on Triangular Formation

Euro to Dollar Exchange Rate: EUR/USD Could 'Relocate Significantly' on Triangular Formation

29 March 2016, 13:16
Vasilii Apostolidi

The euro to dollar exchange rate found buying interest at the start of the week at the 20 day moving average at 1.1154.

  • Conversion expected to relocate significantly again over coming weeks
  • Run of 6 days of declines in EUR/USD comes to an end

The move higher comes after a particularly poor run for the euro with highs at 1.13 being rejected once more.

There seems little appetite for the euro at that rarefied altitude! Nevertheless, the shared currency has to be preferred going forward in our view.

The directional bias notable in 2014 and early 2015 was all-out negative, which would prima facie imply an upcoming negative resolution. 

However, as noted by Lucy Lillicrap at Associated Foreign Exchange, "enough base work is apparent that an upside break-out would have to be respected."

Today’s trading will be important to gauge the mood of the market after significantly reduced trading volumes due to the double Easter public holiday hitting many countries.

That the euro is trading above the 20, 50 and 100 day moving averages confirms that, strictly speaking, momentum remains biased to the upside.

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“A bullish candle yesterday has stopped the run of six straight bearish trading sessions for the euro, but is it enough to suggest the correction is over? I remain positive on the euro whilst the support band $1.1050/$1.1100 remains intact and the euro has built from a base of support at $1.1142 posted last Thursday,” says Richard Perry at Hantec Markets.

The momentum indicators seem to be looking to bottom out with the slide in the Stochastics and RSI studies both flattening.

LMAX Exchange meanwhile forecast the recovery in the EUR to USD rate to head towards that massive resistance zone at around 1.13 that I mentioned earlier:

“Despite this latest round of setbacks, the recent push back above 1.1200 still leaves open the possibility of gains to extend towards the next key resistance zone in the form of the 2016 high from February and October 2015 peak at 1.1377 and 1.1495 respectively.”

We have reported over recent days that some are even targetting an extension higher to 1.17 confirming there is no shortage of positive commentary coming out of the analyst community.

Trainfular re-Consolidation Implies a Break-Out

The past 12 months triangular re-consolidation pattern for many USD/European pairings looks to be approaching maturity with prices expected to relocate significantly again over coming weeks argues AFEX's Lillicrap who we heard from breiefly earlier in this piece.

Lillicrap notes that a not too dissimilar situation pertained following the previous major sell-off for this pair between 1998 and 2000: Values then triangulated until mid-2002 then subsequently broke back upward.

Looking still further back another such narrowing sequence between 1997 and 1998 also resolved in a contra-trend manner and although this was eventually reversed it was not until the market had retraced almost half of its prior sell-off.

"Putting that into context now would infer EUR/USD tracking back toward 1.2000 even if such a rally proved ultimately corrective," says Lillicrap.

Fundamentally Speaking: Declines Ahead

Analysts at DNB Markets have confirmed to clients that the euro to dollar exchange rate pairing is on borrowed time at current levels.

In a note to clients DNB have confirmed their forecast for EUR/USD over the 1, 3 and 12 months are 1.10, 1.07 and 1.00, respectively.

Why so negative then?

DNB are sticking with the theme that the difference in interest rates between the Eurozone and US Federal Reserve will be the ultimate driver of direction in EUR/USD going forward.

Interest rates matter - if rates in the US rise again in 2016 the advantage over the negative rates in the Eurozone only grows.

This should accelerate the flow of capital from Europe to the United States, driving up the dollar in the process.

“Diverging monetary policy will continue to favour the USD. We see a next Fed hike in June and another 2 hikes before year end. More aggressive hikes in 2017,” say DNB, Norway’s largest bank.

The ECB is on the other hand expected to cut the deposit rate by another 10 bps and increase asset purchases in March.

That said, over the longer-term the euro should recovery.

“Despite the anaemic recovery in the Eurozone, the risk of an unfavourable outcome will gradually be reduced,” say DNB, “Eurozone current account surpluses and central bank demand for EUR should result in a stronger EUR going forward.”

What to Watch Going Forward

- US non-farm payrolls data (Friday) is expected at +197k. The unemployment rate is expected to hold steady at 4.9%.ISM Manufacturing (Friday) is expected to pick up to 50.7.

- Yellen to speak before Economic Club of New York (tonight). Fed’s Dudley speaks on Thursday

- Eurozone Flash Inflation (Thursday) is expected at -0.1% y/y,

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