Investors long in the euro could take some comfort, even as the fragile outlook for the economy continues to chase the single European currency. The downward trajectory of the price of the EUR/USD currency pair extended to the support level at 1.0635, its lowest in more than two months. It closed trading last week, stable around the level of 1.0705, and its highest during the same week was 1.0780. The tendency for performance is still bearish.
Slowing inflation and fading optimism about the region's growth sent the euro into its worst month since April 2022. Short-term bets against the euro using currencies other than the dollar are becoming increasingly popular. But despite the headwinds, investors are increasingly viewing the new euro's weakness against the dollar as a buying opportunity, pointing to the divergent interest rate paths on both sides of the Atlantic. Commenting on this, Jeff Yu, chief currency analyst at Bank of New York Mellon Corp., said: “Selling the euro is no longer such a hard hit as it was a month or two ago. The peak of momentum has already occurred.”
In general, traders are betting that the US Federal Reserve will end its advances by the end of July. Meanwhile, the European Central Bank is expected to turn to cuts later next year, after raising rates and keeping prices at their highest levels in more than two decades - making Europe's common currency - the euro - an attractive long-term bet.
For his part, Sam Linton-Brown, currency analyst at BNP Paribas, said: “It is a case of buying on dips rather than selling on highs.” And “a year from now we see it above 1.10 and we don't see credible scenarios where the price goes below 1.05 and stays there.”
The euro fell 3% in May, moving from a one-year high it bought at just under $1.11 at the start of the month, to below $1.07 where it has been hovering ever since. The sell-off came after hawkish noise from the European Central Bank and improving growth expectations encouraged investors to build bets on the strong euro to its highest levels since September 2020. The analyst added that despite near-term pressures, there is room for the euro to rally as more bonds in Europe unwind. Its negative returns, which reduces the relative attractiveness of dollar-denominated assets. Meanwhile, traders in Europe say a safety net is forming for the currency, making a significant drop below 1.05 unlikely given hedge funds and interbank desks buying interest if it dips below there. Demand for options that pay out if the euro weakens below this level was almost non-existent earlier this week.
The outlook for the euro looks much brighter than it did at this time a year ago. Negative yields, recession risks and mounting concerns about an energy supply crisis during the early days of Russia's invasion of Ukraine pushed the euro below the level against the dollar for the first time ever.
But undoubtedly, fears of another European energy crisis or excessive interest rate increases from the European Central Bank dampening growth could dampen the bullish outlook. Danske Bank cites this in its forecast that the common European currency will fall to 1.03 within 12 months. Others warn that a new wave of turmoil in the US banking system or a global recession could lead to a decline in the euro in the coming months.
“If the energy crisis erupts again, it will leave the euro more exposed than the US dollar,” said Jens Nervig Pedersen, forex analyst at Danske Bank in Copenhagen. “This is one of the reasons why we maintain this negative euro-dollar bias.”
For now, the path of the euro in the coming months will be largely driven by how far US interest rates begin to fall. Currently, traders are betting on an almost 80% probability that the Fed will cut interest rates by 25 basis points by December, after raising them to 5.5% by July.
EUR/USD could rally above 1.10 in the second half of the year as markets get a clearer view that interest rate cuts in the US are coming, according to Sami Schar, chief economist at Lombard Odier Group. While both the European Central Bank and the Fed will have room to cut interest rates as inflation continues to slow, the Fed has "more room to cut," he said.
Euro predictions against the dollar today:
- According to the performance on the daily chart below, the general trend of the EUR/USD currency pair is still bearish.
- Stability will remain below 1.0800, strong support for the bears' control over the trend.
- Its losses, which approached the next psychological support 1.0600, was a catalyst for the technical indicators to rush towards saturation levels.
- Strong selling, and the EUR/USD is waiting for stimulus factors to start reversing the general trend, which will not happen without the bulls returning to the vicinity of the psychological resistance 1.1000 again.
Investors' sentiment towards the future of US debt, and signals from both the US Federal Reserve and the European Central Bank, will have a reaction to the performance of the currency pair throughout this week's trading.
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