Forex Investment and Currency Trading

1-3 Month Euro Outlook

After a month of thrashing around in a broad range, EUR/USD ended June at the top of the range and up 1.5%. In part, this reflects a further 20bp rise in ECB rate expectations, though a parallel move higher in rate expectations in much of the rest of the world, limited EUR’s gain. The view is remained that EUR/USD will not retest the all time high of 1.6018 and that a gentle downward trend is in prospect for the remainder of the year. In the very near term, technical resistance at 1.5840 is expected to attract new selling interest. It is noted that prices must pierce key triple bottom support at 1.5344 in order to complete a topping pattern and target support at 1.5150.

The principal downside risk for EUR is that markets discount too much ECB tightening in both the short and medium term. Despite constant reassurance from ECB officials that a series of rate hikes in not in prospect, markets continue to discount ECB rates rising to a peak of 4.75%. Beyond the interest rate dynamic itself, however, a significant risk is also seen that inflated rate hike expectations become negative for EUR rather than positive, as is already the case for GBP.

6 – 12 Month Euro Outlook
Longer term, market continues to expect a general recovery in USD that will take EUR lower by default. Although the Fed is expected to begin tightening somewhat later than the curve currently discounts, on any measure we are now in the tail end of the US monetary cycle and at the point at which FX markets begin to price in, rightly or wrongly, the subsequent recovery. Technically, a close below initial support at 1.5157 would target 1.4968.