EUR/USD Forecast: don't rush to buy the greenback

EUR/USD Forecast: don't rush to buy the greenback

28 May 2017, 08:16
Valeriy Brusilovskyy

The EUR/USD pair closed the week marginally lower around 1.1180 but not before settling a fresh 2017 high at 1.1267. The dollar maintained its recent weakness, despite risk aversion disappeared and US equities rallied to record highs. The greenback entered positive territory against its European rival on Friday, but not for the right reasons: most of dollar's "strength" is coming from either certain weakness in a certain rival, or profit-taking ahead of the long weekend.

Markets gyrated around the latest FOMC Minutes released last Wednesday, which put the dollar under pressure, as despite Fed officials consider appropriate to keep tightening, they added the caveat that “it would be prudent” to wait for evidence that the recent slowdown in economic activity had been transitory. Also, the Minutes referred once again to begin unwinding the massive $4.5 trillion balance sheet, with policymakers agreeing on the need to start reducing it "soon."

Things improved for the American currency on Thursday, as oil prices plunged following the OPEC's outcome of the meeting that took place in Vienna. Oil ministers confirmed what the market already knew that is that producers will extend their output cut until March 2018. Speculative interest runs to sell crude, disappointed by the soft decision that could easily be offset by the continued increase in US production. Slightly better-than-expected GDP and Durable Goods Orders figures released this Friday in the US, also helped the USD, mostly due to the absence of relevant European releases, but a setback in consumer confidence, according to the Michigan sentiment index, interrupted the advance.

The imbalance between Central Banks' policies favors the dollar, but data supports the EUR. The final Markit PMIs for the euro area came at their highest in six years, not to mention core inflation keeps rising towards ECB's target, and chances of tapering in the Union are back on the table, despite Draghi's rhetoric.

So far, a return of dollar's bulls seems unlikely, but clearly, not impossible. This upcoming week the US will release its NFP report, but given that the job's sector has been among the best performers during the last two-three years, it won't be enough to back a long-lasting dollar advance. Whatever advance the currency may see, will likely remain related to rivals' weakness, as in the case of Pound, rather than self-strength.

The technical perspective for the EUR/USD pair is still bullish, but with increasing chances of a downward correction, after the pair stopped near the post-US election peak of 1.1299. The weekly chart shows that technical indicators have lost upward momentum and turned flat, but also that they remain near overbought levels, whilst the price remains far above a bullish 20 SMA and a flat 100 SMA.  In the daily chart, the technical picture is quite alike, with indicator giving some signs of upward exhaustion in overbought territory, but the 20 DMA maintaining a strong bullish slope below the current price. The pair bottomed at 1.1160 this week, the immediate support, followed by 1.1080, where buying interest has been surging the previous week. Below this last, the downward correction can gather momentum with 1.1000 and 1.0930 as the next relevant supports/bearish targets. 1.1260 and 1.1300 are the levels to watch to the upside, with an extension beyond this last favoring an advance up to 1.1460, a long-term strong static resistance, as it capped advances pretty much since February 2015.

Sentiment towards the greenback is mixed as the currency is seen gaining against modestly against the EUR and AUD, but under down against other rivals. The Pound is seen weakening on average by the most when compared to other rivals, undermined by caution ahead of the election and Brexit.

In the particular case of the EUR/USD pair the outlook is bearish for the upcoming week, but by little, as just 50% of the polled investors favor a downward move, with an average target of 1.1178. Bears are barely a majority also the monthly basis, but jump up to 82% in a three-month view, aiming for 1.0889. The number of bears is slightly above those registered last week when they represented the 80%, but the average target is now higher in all the time frames under study, reflecting decreasing faith in a strong dollar recovery, despite Fed's tightening policies

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