The EUR to USD conversion has soared by over a percent on Friday the 3rd as markets rapidly unload their exposure to the US dollar following the release of some incredibly poor US employment data.
The euro / dollar's outlook has suddenly shifted from negative to positive following a rally in excess of 1 pct on Friday the 3rd of June.
The EUR/USD exchange rate has soared from a low of 1.1136 to record current levels of 1.13 after the US Bureau of Labor Statistics reported non-farm payrolls at 38K for May - markets were forecasting a read of 164K, this is the smallest pace of gains since September 2010.
"Coupled with subdued wage growth the data throws a large spanner in all the works of Janet Yellen and other Fed members in attempting to adjust market expectations to a faster rate hiking cycle," says Tom Floyd at Foenix Partners.
Chris Turner at ING says he believes the euro should ascend to the top of recent ranges from here:
"EUR/USD is performing well. Short EUR positioning is nowhere near as large as it was last December. We suspect sellers may return in the 1.1500 area on the assumption that if the US really is slowing, the ECB may after all threaten fresh stimulus."
We believe that the move higher validates the 2016 uptrend in the exchange rate and we will look for further gains:
“An overwhelmingly bearish EURUSD could have many traders tempted to jump on the bandwagon in an attempt to squeeze a few extra pips out of the pair. However, despite what the EMA’s might be telling us, the EURUSD could be about to make a fairly spectacular recovery,” warns Blackwell Global’s analyst Mathew Ashley.
In his view the pair will rebound, in the first leg of a larger pattern higher called a three-drive pattern, pictured on the chart below.
Our own base case technical outlook, made 24 hours previously, was for a break above the 1.1201 highs leading to a move up to the 1.1280 bar.
We were looking for a break above 1.1210 for confirmation of more upside to a safe target at 1.1275. We will update our forecast targets accordingly now that these levels have been smashed.
Euro Rally Halted by ECB
The euro was seen recovering over the opening two days of June, however advances were capped by the currency's central bank.
The European Central Bank (ECB) has revised up their inflation forecast for 2016 from 0.1% to 0.2% following their June meeting held in Vienna - a move that would typically have been expected to support the euro.
Indeed, the initial reaction by the euro exchange rate complex was broadly positive with EUR/USD ticking higher.
The gains were however bled through the course of the press conference as President Draghi tried his best to keep markets alert to the notion that the ECB would act with further rate cuts and stimulus if conditions warranted it.
Such a condition would be a UK exit from the Eurozone, Draghi comments that the UK and Eurozone are mutually beneficial and says explicitly that it is the ECB’s belief that the UK should remain in the European Union saying both parties will benefit.
The ECB stands ready to act should financial conditions tighten significantly in the event of a UK exit from the Eurozone.
The ECB President was desperate not to sound hawkish and hinted the euro should be weaker while suggesting risks to inflation are more balanced towards the upside.
Deutsche Bank Still Forecasting a Lower EUR/USD Medium-Term
"Recent developments in EUR/USD point to a renewed deterioration in fundamentals across our two most important guiding frameworks – flows and real rates," says George Saravelos at Deutsche Bank, a long-time bear on the shared currency.
On the flow side, the basic balance - the sum of the current account, FDI and portfolio flows - remained negative but stable throughout last year as large portfolio outflows offset the current account.
Flows have recently taken a turn for the worse however, this time driven by foreign direct investment (FDI) outflows.
European appetite for foreign companies is picking up, and a similar message is given by our more forward-looking cross-border M&A monitor. The basic balance is now at its weakest post-crisis levels pointing to a EUR/USD break below 1.05 based on previous relationships.
"On the real rates side, the recent Fed repricing has helped push near-term “fair value” back down below 1.10, and it is our belief in the continuation of a Fed hiking cycle – however shallow – that is crucial for this rate spread to continue to widen," says Saravelos.
Strategists at Barclays meanwhile say they are overall bearish on EUR/USD and would prefer to sell upticks:
“A break above nearby resistance in the 1.1220 area would signal room towards 1.1300/50 before sellers emerge. Our downside targets are towards 1.1095 and then the 1.0990 area.”