Citi: Euro / US Dollar Exchange Rate Looking Increasingly Overvalued

The euro to dollar exchange rate (EUR/USD) may be nearing its zenith on account of it being overvalued.

• Three analysts warn that the euro is looking increasingly likely to capitulate lower
• EUR to USD conversion quoted at 1.1361 today

We have written recently of signs that the euro is looking to make a notable break higher as it finally forces the dollar lower and moves out of its long-term range between 1.05 and 1.14.

Moving the debate along, we hear today that analysts at Citigroup believe that the break higher to 1.20 is not likely and they warn clients that the euro is looking expensive.

Citi argue fundamentals are likely to re-assert their impact on FX and with US rates (and by implication USD) already pricing in a very dovish Fed outcome for this year.

Money markets are ascribing a mere 50% chance of one 25bp hike this year.

The fuel to the dollar rally of recent years has been the promise of higher interest rates and when the fuel supply is squeezed the dollar naturally falls back.

However, the extent of how far the dollar will fall is key to the euro / dollar exchange rate’s outlook.

“USD bears are going to find it difficult to even reach last year’s lows let alone slide beyond that,” argue Citi.

The USD Index hit a low of 91.08 in 2015, some 3.5 big figures below current levels.

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“At the same time, the medium to longer term fundamentals on EUR and some other G10 FX remain bearish and current longs are likely to re-asses their overall trade should EURUSD (for instance) trade past the 1.1450 level,” say Citi.

It is suggested that the key factors driving the dollar lower (seasonality plus Yellen) are starting to fade.

In addition Citi note weaker EUR fundamentals should now likely re-assert themselves with ECB purchases of debt under its QE program set to kick start at the beginning of the new month.

This should result in a roughly 33% increase over existing flows making Citi, “EUR bearish once past the US jobs report.”

The combined monthly purchases under the ECB’s Asset Purchase Programme (APP, loosely referred to as the QE programme) are to increase as of 1 April 2016 to €80 billion from €60 billion.

Investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets eligible for regular purchases under a new corporate sector purchase programme (CSPP).

The CSPP will be added to the APP and will be included in the combined monthly purchases.

Commerzbank, Intesa Sanpaolo: EUR/USD Losing Momentum

The pace of the euro’s tear higher is also of concern for those looking to bet on further climbs as the pair is left looking rather overbought.

“EUR/USD’s high on Friday at 1.1438, was not confirmed by the daily RSI and this suggests a loss of upside momentum just ahead of the September and October highs at 1.1460/95 and the 1.1577 pivot line,” says Karen Jones, a technical analyst with Commerzbank in London.

Jones considers this line as, “the last defence for the 1.1713 September high,” which would be seen as the next target for the move higher.

Nearby support is offered by the accelerated uptrend at 1.1276, this guards the 1.1144 24th March low.

Key nearby support lies the 1.1060/58 December high and the March 16 low. This guards the bottom of the range at 1.0808.

The baseline scenario held at Italian lender Intesa Sanpaolo is still a weakening of the exchange rate towards EUR/USD 1.10 on a 1m horizon.

"Although a return to that level may prove neither smooth nor immediate. In the euro area, an important event this week will be Draghi’s speech on Thursday," says Intesa Sanpaolo's Asmara Jamaleh, "the event which may have the strongest downside impact will probably be Draghi’s speech on Thursday."

Following the ECB meeting of 10 March, the euro had appreciated, mostly because Draghi’s statements had let on that the interest rate cut in March may have been the last.

"Any doubts on this latter point would aid the retreat of the euro," suggests Jamaleh.