As Euro to Dollar Exchange Rate Declines Ease, we Reiterate Forecast for a Decisive Break Higher

The euro to dollar exchange rate has struggled over the course of the past 5 days but signs are emerging that suggests the sell-off is easing.

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On Friday 1 EUR buys 1.1257 USD; a rate that is notably lower than the 1.1465 USD that could be purchased only three days previously.

However, it appears that selling pressure has eased with the down-move looking over-extended in the short-term and our analysis suggests downside risk is limited to 1.1226.

Others agree:

"The low has been 1.1232 and the quick rebound from the  bottom indicates that the downward pressure has eased," says Quek Ser Leang at U.O.B in Singapore, "the current movement is likely the early stages of a consolidation phase." 

U.O.B tell clients to expect sideway trading for today, likely between 1.1230 and 1.1300.

US Inflation Halts Dollar's Advance

The dollar has given back some of its recent gains to the euro as US inflation readings missed analyst forecasts comfortably at 0.9% for the annualised March figure.

With oil surging over 10% in the past few weeks, a relief in commodity pressure hasn’t filtered through to US figures, which could cause Janet Yellen further headaches.

"At present the Fed is proceeding with caution, with stable growth in the labour market being the linchpin of US economic progress. The pullback in inflation does, however, cast a gloomy cloud over America’s interest rate cycle, with Yellen unlikely to hike in the next few months if we are comfortably outside of the 2% target rate," notes Alex Lydall, Senior Sales Trader at Foenix Partners.

The dollar has suffered over recent weeks as markets come to the realisation that they would be lucky to get just one rate rise out of the Fed in 2016; this compares to the four rate rises that were forecast at the start of the year.

Until signs grow that the Fed are willing to raise rates the dollar will struggle; indeed such a low inflation reading has offered no signs that the stance may change.

In Striking Distance of New Highs

While the EUR/USD exchange rate has not yet done enough to break back into an extended mini-range, between the mid-1.13s and the mid-1.14s, the pair is nevertheless still towards the top-end of a much larger year-long range, where it has been attempting to break out higher for over a week.

Analysts may be questioning whether the decline back below 1.13 signals the end of upside hopes, after the move lower today has brought it to 1.1309.

If the EUR/USD exchange rate continues falling it could reach the R1 monthly pivot at 1.1226.

The R1 would be expected to stall the down-move as traders often cluster buy orders at pivot levels in the hope of catching a bounce.

Overall, however, we don't think this spells the end of upside breakout hopes yet.

This sell-off is probably just a correction before the mini-up-trend from the December 2015 lows resumes, and pushes back up against the range highs at 1.14-15.

As such we are sticking with our forecast for a breakout from the range, with confirmation coming from a move above the range highs at 1.1510.

Such an upside move would be expected to reach a target at 1.1585 initially, followed by 1.2000 eventually.

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THis week we saw how positive Chinese eport data supported the dollar as it lessened Federal Reserve (Fed) fears about global growth, making it more likely the Fed will raise interest rates in 2016.

It had the opposite effect on the euro, which, due to its low interest rate is a major funding currency, used to fund investments overseas, and as such is now likely to be borrowed and sold more heavily, as the global outlook stimulates more not less investment in emerging markets.

A move by EUR/USD back into the range, chimes with recent forecasts from Lloyds Commercial Banking, who expect the pair to end the year at 1.1200 as the Federal Reserve increases interest rates in June, supporting the dollar.

A rise in interest rates strengthens a currency as it increases inbound capital flows from investors seeking a higher return on their money.