Euro Exchange Rates: Ideas on the Next Big Moves

euro to dollar exchange rate 1

Our technical studies suggest a breakdown through 1.1360/1.1320 is needed to add further evidence that the rally to 1.1615 was a false break.

The euro exchange rate has finally rebounded after 6 straight days of losses against the US dollar.

The mid-week recovery keeps the uptrend in the EUR/USD pair intact but there's significant resistance above current levels at 1.1465 (early April consolidation high), 1.1500 and 1.1.1615 (May high).  

However, against the pound sterling the almost-perfect sideways move that has characterised May continues.

That said, we have written here that the euro to pound is forming a triangle pattern on the charts which leads us to pencil in a potential target at 0.8000.

This week's Eurozone economic reports have been disappointing and today’s Eurozone industrial production release isn't expected to lend much support to the single currency because Germany and France reported significant declines in IP.  

“However the question of whether EUR/USD breaks 1.1500 or drops below 1.1300 will be determined by Friday's economic reports. First quarter GDP numbers are also due for release from Europe and growth is expected to have accelerated in the first quarter,” says Kathy Lien, analyst with BK Asset Management. 

Our technical studies suggest a breakdown through 1.1360/1.1320 is needed to add further evidence that the rally to 1.1615 was a false break of the 1.14/1.1465 previous range highs.

Resillience is therefore still readable in the technical charts and we suspect techs are likely to be of more influence than fundamental drivers in this pair for some time to come. 

Indeed, the euro has held firm over the past 24 hours despite German Industrial Production (IP) unexpectedly plummeted by -1.3% in March when analysts had estimated only a -0.2% fall.

The previous month’s -0.5% result was also revised down to -0.7%.

The steep decline, however, had little effect on the euro’s exchange rate as the EUR/USD actually rose on the hour following the announcement.

The explanation is partly due to January’s extremely good IP result, which showed a 2.3% increase, the largest since 2009, and because February’s -0.7% fall was partially due, “to backlog orders and a statistical working-day effect”, according to an analysis of the data undertaken by UniCredit’s Dr Thomas Strobel.

The higher than expected January figure was helped by “mild winter weather” boosting construction activity, and raised the bar for February and March.

Strobel, who ends the note on a positive, arguing that the German economy had strong Q1, points out that on a “less volatile” quarterly basis IP remains extremely robust in Q1, showing 1.8% rise qoq, with Construction contributing the lion’s share of the growth with a 3.4% rise.

Construction is expected to remain robust in the future as demand for more housing rises following the influx of Middle Eastern refugees into the country.

Another reason for the underlying strength in the euro was the offsetting effect of the better-than-expected trade data, which showed a surprise 1.9% rise in Exports when a -0.1% fall had been forecast in March.

The Trade Balance also showed a record Surplus of 26bn in March, up from 20.2bn in February. 

Factory Orders Soar

Soaring Factor Orders for March, which showed a 1.9% rise when only 0.6% had been forecast by economists, provided further underpinning support to the euro.

The rise in Factory Orders was driven by a stellar 4.0% increase in Capital Goods Orders:

“Factories were buoyed by robust capital goods orders, which rose by 4 per cent, while consumer goods expanded at a rate of 1.6 per cent, on a monthly measure.” According to a report on FastFT.

This may be a sign that businesses are increasing investment in technology, plant and machinery - a positive sign for future productivity which has also been languishing in the doldrums.

Another positive sign was that the pick-up in Factory Orders was driven by increased demand from outside of the Eurozone:

“March’s performance was driven by growing appetite for German goods from outside the eurozone. Non-euro export orders grew by 6.2 per cent while domestic orders declined moderately by 1.2 per cent in March. Headline orders grew by 4.3 per cent.” Continued the FastFT report.

Strobel says that despite the IP miss the German economy showed strong growth in Q1 which was likely to continue:

“Other hard data further indicates that overall economic activity likely expanded solidly in the first quarter of the year.”

He points out that apart from the favourable Factory Orders and Export data already mentioned Retail Sales also showed robust Consumer demand:

“Retail sales (including cars) also gained strongly at the beginning of the year, and, backed by a very favorable labor market and the highest salary increases in real terms since German reunification, should be supportive of domestic consumption.”