Euro Exchange Rate Strength Forecast to Extend

euro to dollar 1

The single currency is on the cusp of breaking out of the shackles of a cast-iron range set against the US dollar between 1.04 and 1.15, success will open the door to levels around 1.20.

In line with expectations, EUR has continued to trade sideways against the US dollar through the start of May.

Neutral indicators continue to suggest further sideway trading, likely between 1.1440 and 1.1540 over the near-term.

The sideways moves, while not appearing particularly exciting, mask the fact the the shared currency remains well within distance of recent highs.

In short, this price action is incredibly positive when viewed through the longer-term looking glass.

Underpinning sentiment towards the euro was the release of better-than-expected Eurozone economic growth data for the first quarter of 2016 which exceeded expectations by a long-shot, rising by 0.6% compared to 0.3% expected equating to an annualised figure of 2.4%.

France grew by 2.0% annualised, Spain by +3.2%.

Germany and Italy will report on May 13; annalysts expect +2.4% and +1.6%, respectively. (The fact that the two countries have not reported also reminds us that the data is an estimate and could be revised either way.)

This exceeds similar data for both the US and the UK, which both showed 0.4% growth in Q1, with the US figure coming out both below expectations and below Q4’s result, and the UK figure in line with forecasts, and lower than the previous quarter.

Of the three major currencies, the euro has had the most support from the Q1 GDP data, and partly as a result of this it has risen above the 1.1600 mark versus the dollar, for the first time since August 2015.

According to Erik Nielsen, Chief Global Economist at UniCredit Bank, the data is a very positive sign that the Eurozone economy is growing at a steady pace:

"We are still very happy with our 2016 eurozone GDP forecast of 1.7%, but I predict that the (eternal) pessimists with growth forecasts below consensus’ 1.5% may be having some trouble sleeping this weekend.”

How High Can the Euro to Dollar Rate Go?

The move up to 1.1600 could be viewed as a breakout from the long-term range the EUR/USD pair has been trapped in for over a year.

This interpretation would indicate an upside target at or above 1.2000, calculated by extrapolating the height of the range higher. As a minimum expectation, a target of 61.8% of the height of the range would give 1.2100, however, due to the considerable psychological importance of the 1.2000 level, this makes an alternative minimum expectation.

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The R2 monthly pivot at 1.1632 provides a stopping off point for the expected rally higher, with another level to watch at the 1.1711 spike highs.

The upside outlook for the euro versus the dollar is supported by the bearish looking dollar index chart, which shows more downside for the dollar against a basket of currencies (including the euro). The chart is showing a break below the neckline for a double top bearish reversal pattern.

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Current Account Surplus

The euro is further supported by its burgeoning Current Account surplus. In order to understand how this is helping the euro strengthen its best to think of the current account of a wealthy friend - as opposed to a country. Such a person would be expected to have a ‘surplus’ of money due to more coming in than going out. Such a surplus would probably lead to increase in the number of friends asking the wealthy friend if they can borrow some money off them. If such a person had their own currency it would, as a consequence of the increased demand to borrow, appreciate in value. A similar dynamic is happening as a result of the euro-zone’s current account surplus, according to Jeremy Stretch of CIBC Global:

“We have seen EUR USD trade above 1.16 for the first time since August.. The uptrend has little to do with domestic fundamentals but is rather a reflection of USD fragility and residual EUR demand, which is a residue of a German current account surplus that remains near 8% of GDP.”

Stretch goes on to imply a strong bullish view on the pair:

“In the near term we risk exploding towards August ‘15 extremes unless and until US data provides a counter weight to EUR USD topside impetus.”

Falling Jobless a Possible Factor

Continued falling unemployment, which decreased to a 10.2% in April, may be another factor improving the outlook for the region and therefore the currency.

euro area unemployment rate

Nevertheless, not all analysts are taking the fall in joblessness as seriously as others, Royal Bank of Scotland, for example, still questioning the impact of the gradual decline on the bigger overall picture:

“Meanwhile the rate of joblessness in the single currency bloc fell to 10.2%. But with Germany’s unemployment rate at 4.2% and Greece and Spain’s above 20%, the Euro Area still has a very long way to go.”