The Euro to Dollar Exchange Rate Remains 'Constructive' as Break of 1.13 Takes Place
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The EUR/USD retains a bullish bias despite having suffered a soft patch at the start of the week beginning 22nd August.
The Euro remains in the driving seat against the US Dollar having broken through 1.13 at the time of writing.
The EUR/USD has enjoyed a strong rally since late July and has been determined to try and test the pre-Brexit highs of 1.1425 again.
The lion's share of the move has largely been as a result of a weaker US Dollar which has been undermined by a US Federal Reserve that appears reluctant to budge on raising interest rates.
“The Euro has rebounded from a brief soft patch, with the technical picture remaining constructive. Resistances continue to be found at 1.1365 and 1.1430, with key supports located in the 1.1225/1.1233 zone,” says Ralf Umlauf at Helaba Bank in Frankfurt.
On the European front, a wealth of sentiment indicators are on this week's calendar, led by tomorrow's preliminary purchasing managers indices in France, Germany and the Eurozone.
The previous month had revealed that political uncertainty due to the Brexit vote is not reflected as strongly as in sentiment surveys with expectation components.
“Economic growth at the beginning of the third quarter looks positive. In Germany, the PMIs are well in expansion territory. In particular, the services sector is is proving strong and signals robust domestic economic growth," says Umlauf.
August's data are unlikely to alter this picture. Helaba expect Thursday's release of the ifo business climate index to also come in correspondingly stable, with the ZEW survey providing a positive indication on balance.
The EUR/USD recovery of the previous week was partly due to a better than expected ZEW Sentiment data result, which showed German finance professionals overall more upbeat about the medium-term outlook for the economy, as Brexit concerns fade.
The ZEW is an important study which tends to lead the economy, so a positive result from the survey usually precedes growth, in Germany and the Eurozone.
A major driver for the Euro side of the pairing is the outlook for ECB policy, which is showing diminished expectations of further easing materialising in September.
This would be an all-out positive for the shared currency as further rate cuts and increased quantitative easing would undermine the currency to some degree and ensure strength against the Dollar remains capped.
According to Societe Generale’s Kit Juckes, the market-based probabilities of a September hike have fallen to 17.8% due to the strong ZEW data, whilst the odds this year, “have fallen from 52% to 42%.”
The Euro has its detractors, however, with TD Securities’ Head of Global Strategy, Richard Kelly, saying that, “after months of flying under the radar we think EUR weakness could come back as a significant market theme.”
Of the argument’s put forward by Kelly, the stretched divergence between European and US swap rate differentials (a kind of forward looking indication of interest rates), is one of the most compelling.
This appears to indicate that whilst Eurozone interest rates are expected to remain lower than US rates in the medium-term, the euro is rising versus the dollar.
The expectation would be for the opposite to happen, and the euro to weaken due to the lower interest rate outlook in its region, since international capital tends to flow to the higher yielding denominations.
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