The EUR to USD conversion is forecast to return to the upper end of its now well established range - here is why.
- "While the break below 1.1230 bodes well for our bearish EUR view, the downward momentum is not as impulsive as we would like" - U.O.B
- "In our view, the USD is set to stay weak and depreciate further" - UniCredit
- To the upside, the R2 monthly pivot at 1.1780 - a level traders use to anticipate changes in the trend - could present an interim target
It is over a year now since prices in EUR/USD bottomed at 1.0462, since then they have oscillated up and down within a range between those lows and highs at around the 1.14-15 level.
It is difficult to forecast prices when they are moving in a range because the very fact they are not trending means investors are confused about the outlook - and normally they are right to be confused.
Nevertheless, we may try, and overall the exchange rate remains nearer the ceiling of the range than the lows, and so we cannot discount the possibility of an upside breakout.
A move, therefore, above the 1.1510 level would probably confirm the onset of a bullish wave higher, to a target at 1.1589, initially.
This might be followed by a further move higher to a longer-term target at 1.2000, by extrapolating the width of the previous range higher. Such a move would gain confirmation from a break above 1.1630.
The R2 monthly pivot at 1.1780 - a level traders use to anticipate changes in the trend - could present an interim target, as it is likely to be a formidable obstacle to the bull trend.
Clusters of Support Lines Below Price Stymieing Further Downside
The pair looks like it has formed a head and shoulders topping pattern on the daily chart, which we have drawn on below for clarification.
This is a bearish reversal pattern, which occurs at the top of up-trends, marking their end and the start of the new trend lower.
The problem with the pattern on EUR/USD is the cluster of tough resistance lines underneath it, which are likely to inhibit any breakdown in the exchange rate.
First there is the monthly pivot at 1.1204, then the 50-day moving average at 1.1184 and finally the 200-day at 1.1062.
UniCredit: Forecasting a Euro Recovery
The US Federal Reserve is expected to remain on hold again and, importantly, maintain a cautious approach without making any commitment on dates.
"This outcome is unlikely to offer the USD meaningful support. In our view, the USD is set to stay weak and depreciate further, potentially more slowly than it has recently, since some of its previous overvaluation has already been absorbed," says Roberto Mialich, FX Strategist with UniCredit Bank in Milan.
Next week, Mialich therefore expects EUR-USD to resume a more bullish tone, at least towards the upper end of the 1.12-1.14 band.
US GDP data are also expected to disappoint, showing a sizeable deceleration from 4Q15.
Growth in the eurozone, where a new CPI estimate is also due, is meanwhile expected to show a +0.5% recovery on a quarterly basis after +0.3% in 4Q15.
U.O.B: More Declines Ahead of Strong Support
Taking a slightly different view, and one readers should certainly be aware of, is the team at United Overseas Bank (UOB) in Singapore who confirm they retain a bearish stance on this currency pair.
"While the break below 1.1230 bodes well for our bearish EUR view, the downward momentum is not as impulsive as we would like and this coupled with the strong support at 1.1145 suggests that EUR may struggle to move below this level," says a note from analysts.
As such, those who are short on euro-dollar may like to take partial profit at this level.
US Fundamentals Strong, Euro-Zone on Track
Reading US data is difficult with some pointers being weak while others are strong.
The fall of US Continuing Claims to a 43-year low appears to have caught headlines as it is indicative of a very strong labour market.
This is important due to the proximity of the FOMC meeting on Wednesday the 27th.
Labour is an area of the economy the Fed takes very seriously, and continued improvements are more likely to result in dollar strength as the Fed is probably more likely to increase interest rates. Higher interest rates generally strengthen the home currency.
Although Q1 has been soft in many estimations, current estimates are for 2.0% growth in 2016, which remains higher than for the
Euro-zone where growth estimates are about 1.5%.
Nevertheless, a note from UniCredit on Friday, argues PMI data for April, though flat or down in the case of Composite, is still nevertheless reflective of ‘gradual but steady’ growth:
“But steadily. In April, both the manufacturing and services PMIs were virtually unchanged (respectively at 51.5 and 53.2), with the
Composite indicator down to 53.0 from 53.1. These numbers are consistent with 1.5% annualized GDP growth at the beginning of the second quarter.”
The note continues:
“Admittedly, our and consensus expectations were for somewhat better figures… However, the survey provides some reassuring bits of information. Job creation improved in both sectors, if at a still moderate pace, while manufacturing export orders ticked upwards.
However, firms’ pricing power remains weak across the board.”
The week kicks off with the release of the German Ifo Business Confidence Survey for April, which is forecast to come out at 107.0 from 106.07 previously. This is a significant leading index for both Germany and because of the Germany economy’ size, the whole of the Euro-zone.
It’s then not till Friday that we get significant data, with the release of the CPI Index reading for April. The CPI came in at 100.1 in March.
After the previous weeks poor housing data, it is likely that analysts will be closely watching New Home Sales on Monday April 25.
Expectations are for a rise from 512k to 527k in March.
Durable Goods Orders are out on Tuesday, and are expected to show a rise of 1.7% from -3.0% previously.
More Housing data is also out on Tuesday with the S&P Composite 20.
April Services PMI and CB Consumer Confidence are other major data releases out on that day.
On Wednesday April 27 its FOMC day, but most analysts do not expect any changes in policy.
The Fed’s language, however, will be examined for signs of a change in stance, particularly in relation to whether global factors continue to represent an obstacle to tightening of monetary policy.
Also on Wednesday is more data, including Pending Home Sales, which are expected to show a -0.1% retraction in March.
Crude Oil Inventories are also released with the potential for causing volatility in the price of oil.
On Thursday there is US GDP data for the first quarter - a major release, which is currently expected to come out soft.
The Federal Reserves preferred method for gauging inflation, Personal Consumption Expenditure (PCE) is out on Friday April 29, and is expected to show a 0.1% rise mom in March.
Also out on Friday is Michigan Sentiment, which is forecast to rise to 90.7 in April.