Forex Investment and Currency Trading

1 – 3 Month Outlook – retest highs

EUR/USD spiked to a new all time high of 1.5904 in mid-March. Unusually, by recent standards, much of the move represented independent EUR direction, rather than EUR gaining by default as USD sold off across the board. In markets that were generally dominated by rising risk aversion, usually a fairly neutral EUR environment, EUR matched the gains seen by CHF and JPY. EUR’s gains largely reflect diminishing expectations for ECB rate cuts. At the trough of rate expectations in mid-February, EURIBOR futures fully discounted three 25bp ECB rate cuts. Currently, futures discount one cut at most. Near term, further hawkish rhetoric from ECB members, growing evidence of decoupling of the European and US growth cycles and USD weakness will likely see EUR/USD retest and possibly break 1.60. Technically, a break of resistance at 1.6037 could see a test of 1.6255. However, the view is remained that the EUR bull market/USD bear market is in its final stages and expect the peak to be seen in
Q2. A significant driver of EUR strength is the ECB’s apparent tolerance as concerns on second round inflation effects remain elevated. As Q2 develops, these concerns are likely to diminish and the ECB will eventually signal a further relaxation of its current neutral bias, implicitly signalling a less benign attitude to an overvalued exchange rates.

6 – 12 Month Outlook – peak in sight

The medium term views are dominated by a broadly based rebound in USD and EUR will not be immune to this global trend, particularly as markets move to discount more substantial ECB easing in H2. Long term capital flows data also suggest EUR support is beginning to fade. Having totalled EUR224bn in 2007 H1, portfolio inflows had dwindled to just EUR53bn in H2. With long term capital flows no longer a prop, deteriorating short term rate sentiment is potentially very negative for EUR. Technically, a sustained move above a channel top at 1.5407 is becoming increasingly unlikely as the monthly studies reach an overbought extreme. However, a close below 1.4675 is required in order to confirm a price top that would project a retracement to 1.3986 thereafter.
Resistance is located at 1.6000 and 1.6411.