EUR/USD: Bullish Momentum Faded: Range & Outlook

[thenews]

The euro’s attempt to break higher against the US dollar following the more dovish policy signal form the Fed has failed in the near-term, notes BTMU.

"As a resultEUR/USD continues to remain range bound. It is consistent with the signal from our short-term valuation models whose estimates for EUR/USD have remained relatively stable in line with the pair’s average over the last year at around the 1.1100-level.

We continue to view the risks as more skewed to the downside in the coming months ahead of the EU referendum as heightened uncertainty over potential negative spillovers from Brexit for the rest of Europe should begin to weigh more on the euro," BTMU argues.

"However, the US dollar continues to remain on a softer footing more broadly which is unlikely to change materially in the near-term. The latest economic data releases from the US have reinforced expectations that the economy expanded weakly in Q1.

We are not expecting any significant policy announcement from the ECB at their upcoming meeting who are likely to reiterate cautious optimism that recently announced easing measures will prove effective at lifting inflation," BTMU adds.

BTMU is neutral on EUR/USD around current levels seeing the pair trading in a 1.1050-1.1450 range.

[thenews]

The USD has made a tentative recovery against the EUR and JPY this week, supported by US front-end yields and firmer oil prices.

We see scope for the USD to extend its gains against the EUR in the near term. This is consistent with STEER, signalling that EURUSD short-term fair value is closer to 1.1206 (see chart).

Going forward however, we don’t see scope for a sustained USD recovery, particularly if dovish Fed comments continue to prevent a rebound in Fed tightening expectations. We continue to target 1.16 in EURUSD by mid-year.

Next week’s calendar of FOMC speeches features the Fed’s Dudley and Kashkari. US data are limited to housing starts and the Philly Fed survey.

The Reserve Bank of Australia (RBA) minutes from its 19 April meeting may shed more light on the recent adjustment to the easing bias signalled at the meeting. We remain bearish on the AUD versus the EUR and NZD, and see significant scope for markets to turn more dovish on the RBA. Elsewhere, Canada March CPI data and retail sales are out on Friday (22 April). The outcome of the Doha oil producer talks on April 17 will be key to crude prices and we remain inclined to fade strength in both CAD and oil.