Euro Exchange Rate: Strength vs USD and GBP Likely to be Fleeting

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Recent economic data out of the Eurozone has failed to materially improve sentiment towards the EUR and strategists will continue to look for selling opportunities on any strength in the EUR/GBP and EUR/USD pairs.

Markets have been biased against the euro since the start of May with the headline euro to dollar conversion slipping from above 1.15 down to current levels towards 1.1178.

The euro to pound exchange rate is meanwhile down from its May best at 0.7947 at 0.7598.

There have been moments of strength, however they remain corrective in nature and appear to only offer strategists the chance to enter fresh sell strategies.

“The correction continues and with the strong bearish candle breaking through the late March low at $1.1142 the retreat to the long term pivot band $1.1050/$1.1100 can now be complete. The momentum indicators are taking on an increasingly negative configuration with the Stochastics firmly bearish, the RSI at a near six month low and the MACD lines have just gone negative,” notes technical analyst Richard Perry at Hantec Markets.

“Rallies continue to be seen as a chance to sell and the hourly chart shows the falling 89 hour moving average (currently around $1.1195) has become the basis of resistance in the past few days,” says Perry.

There is now a band of resistance between $1.1180/$1.1245 to look for opportunities to sell as any near term oversold momentum looks to unwind.

US Dollar, Pound Slip on Thursday the 26th

With traders looking for any euro strength to pounce on we note trade on Thursday the 26th could offer a perfect opportunity.

The dollar is lower as expectations for a US Federal Reserve rate rise in June/July pare back with comments from the Fed's Bullard prompting the move.

Bullard notes that there is no reason why the Fed must hold a press conference in
conjunction with a rate hike (as would be the case at the June FOMC whereas the July meeting would not see a press conference) and further points to the many moves over the years without press conferences.

The EUR to GBP conversion has meanwhile recovered on a slight miss in quarterly GDP growth data. While the headline monthly number came on-target at 0.4%, annual growth eased back to 2.0%, analysts had forecast 2.1%.

Also of note was that Quarterly Business Investment decline 0.5%, analysts had forecast an increase of 0.1%.

Eurozone Economic Data Strong, Germany Leads the Way

With Greece in line to receive a fresh tranche of bailout money and Germany’s Ifo survey of corporate confidence unexpectedly brightening, the euro should surely be higher.

The IFO report printed at 107.7 versus 106.9 beating expectations for 2nd month out the past three. The current assessment reading was was also better at 114.2 versus 113.3.

According to IFO economist Clemens Fuest the German economy is growing at robust pace with construction sector seeing its highest morale since the reunification.

Still, the road ahead appears hilly for the euro with risks of a U.S. rate hike on the rise. “The news helped to arrest the euro decline which has been on a one way trip south ever since the FOMC minutes last week suggested that the Fed is ready to move on rates as early as June,” says Boris Schlossberg, analyst at BK Asset Management.

Positive German growth data managed to offset some of the weakness caused by the lower-than-forecast Eurozone Composite PMI data on Monday, which showed a slight fall in overall economic activity in the Eurozone in May, after the PMI index fell to 16-month lows.

The data was higher than the Final Eurozone GDP growth figure of 0.5% and unlike Germany the whole Euro-area figure was revised down to 0.5% for the final estimate from the preliminary’s 0.6% estimate. 

German PMI data also outperformed the rest of the Euro-area, after both German Manufacturing and Services rose in May, whilst they fell in the whole euro-zone.

Overall signs are that the leading economy is pulling ahead of the others, indeed sentiment data from the prestigious ZEW institute, which regularly survey’s 3,500 financial professionals, showed a rise in current economic sentiment for Germany in May, although that was slightly offset by a drop in the ‘outlook’ responses, which is a 6-month ahead forward-looking gauge.

On the Radar: Political Uncertainty on the Rise

The news of the success of the far-right FPO party in the recent Austrian presidential elections could also be weighing on the Euro Index which is currently down by -0.6%, as it raises the spectre of rising nationalist parties in other EU member countries.

The FPO presidential candidate, Norbert Hoffer, had Eurosceptic policies which would have led to a probable removal of Austria from the

Eurozone, if he had been elected. It was only due to the narrowest of margins (31k votes) that he was not elected.

Instead the Green’s Alexander Van Der Bellen was elected as the next president.

The far right FPO party, however, leads in polls showing how people would vote in a general election, leading to a probable FPO government if an election were held soon, however, the next one is in 2018.

The rise of the far right is a Europe-wide phenomenon, although gains are most noticeable in Holland, France and Italy, according to Business Insider's Mike Bird

“In the Netherlands, Geert Wilders'PVV is 18 points ahead of the governing VVD in the latest polls. Marine Le Pen's National Front leads in most polls in France. In Italy, Matteo Salvini's Northern League is riding high.”

Last October the populist and right wing Swiss Nationalist Party won an election with 29% of the vote, using campaign posters which were criticised as being “openly racist.” 

Whilst the far right is still far behind major parties in Germany, Spain and the UK, the possibility of Front Nationale winning in France and cankering the core of Europe from within, is not a far off possibility by a very real probability.

Therefore it's possible investors could begin to fear political instability in the euro-area, which could cost the euro.