Euro-Dollar: Scoping 1.15

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The Euro-to-Dollar rate can squeeze up to 1.15 in the near term, according to analysts.

The exchange rate trades at 1.1463 at the time of writing, probing the top of its July range after a second day of soft US inflation data undermined the Dollar.

“USD steadied after sliding to near a one-month low yesterday,” says Elias Haddad, Global Head of Markets Strategy at Brown Brothers Harriman. “Cooler than expected June PPI inflation reinforced the moderation in June CPI inflation, weighing on the Fed funds futures curve and undermining USD.”

That repricing of the Fed has proven to be the primary engine of the Euro’s recent advance, and will likely determine the extent of gains from here.

“The data helped to wipe out any realistic chance of a rate hike as early as the July meeting, while the odds for September fell to less than 60%,” says Raffi Boyadjian, Lead Market Analyst at Trading Point. Notably, lower food prices joined energy as a drag on the producer price index.

“There’s been some support to risk assets by this week’s subdued inflation readings in the United States. Hot on the heels of Tuesday’s soft CPI report, producer prices also rose by less than expected in June,” he adds.

What Comes Next?

The short-term technical picture underpinning euro-dollar has improved alongside the shift in rate expectations.

“EUR/USD broke through previous strong resistance, in line with the July 2 peak, at 1.1473,” says Jeremy Stretch, an analyst at CIBC.

“The next critical dynamic would be a daily close above the 1.1478/81 range, which could pave the way for further gains towards the next lines of resistance at 1.1500/03, coinciding with the lows from June 8 and 11,” he adds.

Above: EUR/USD at daily intervals, showing the July range and the 200-day moving average. Chart: Pound Sterling Live / TradingView.

Stretch says continued upward movement towards the 50-day moving average at 1.1537 will likely depend on US rate expectations moderating, given the limited impact of domestic Eurozone data and with ECB speakers stepping back ahead of next week’s policy decision, where less than 2 basis points of tightening is priced.

Société Générale is also watching similar levels as the recent positioning readjustment extends.

“The euro probes upper end of the range, short covering squeeze up to 1.15 not ruled out tomorrow,” says a daily market note from the bank.

Limited Upside Ahead

The repositioning flows and technical setup underpin a constructive near-term setup, but for now there’s also a sense that upside potential could ultimately prove limited.

“We think the dollar’s decline is overdone,” says Haddad.

“US economic outperformance, the Fed’s resolve to get inflation back to 2% anchoring hawkish pricing, and strong foreign demand for US long term securities should keep USD supported,” he adds.

The view echoes research showing Dollar bears ‘lack the evidence’ to drive their thesis; according to DNB Carnegie, the de-dollarisation case is simply not strong enough to trigger sustained USD weakness.

Analysts at the Scandinavian bank say foreign private investors are still accumulating US assets, and there’s little sign of meaningful capital repatriation.

When to Sell Euro-Dollar Again? Timing it is Tricky

Given limited scope for the euro’s ascent, some professional traders are treating the rally as a selling opportunity in waiting, but as always, there’s a risk of pulling the trigger too early.

“Plans to re-sell EURUSD are still there but I would want to see more pain given the (still going) SHF sell streak of 16, thinking well into the 1.15 handle on a more ‘medium’ term basis using the 200d (1.1642) as a risk point,” says a daily note from JP Morgan’s dealing desk.

The reference is to sixteen consecutive sessions of hedge fund selling in the bank’s client flows, a streak that argues against joining the crowd until the squeeze has run further.

The takeaway: 1.15 is both the bulls’ near-term target and could be the zone where sellers intend to reload.