Downward momentum continues for EUR/USD performance, with losses extended to the support level of 1.0555, its lowest in six months. Those losses were enough to push the technical indicators towards strong oversold levels. The performance came where the US dollar is still the strongest with expectations of a tightening policy of the American Federal Reserve Bank and the desire to buy the US dollar as a safe haven.
The euro may be poised to bounce back against the dollar and rise over the coming weeks, however, those wanting a strong euro should be flexible as the rally is expected to be short-term in nature. This came according to an analysis issued by Danske Bank as the third quarter draws to a close, and market participants wonder if the strong dollar recovery has legs to extend to the end of the year.
The letter from Danske Bank analyst Christine Kondby Nielsen believes the euro could see a rebound as investors welcome the moment of peak pessimism regarding the Chinese economy and the eurozone manufacturing sector. She added by saying "We maintain our strategic argument for a decline in the EUR/USD pair based on relative terms of trade and real prices and relative labor unit costs. However, in the near term, we see some possibility of risk on the upside on the background of maximum interest rates and an improvement in the background of the manufacturing sector compared to the services sector, and/or the easing of Chinese pessimism".
The call comes as the EURUSD exchange rate continues a losing streak that has seen it lose nearly 5.80% of its value since peaking at 1.1275 on July 18.
The noticeable slowdown in the Eurozone economy - especially the manufacturing sector - in addition to the disappointing Chinese data against the Euro has been conspired. Meanwhile, the U.S. economy released a series of better-than-consensus economic data that came alongside lower inflation, suggesting the U.S. Federal Reserve may be able to bring inflation back to target without causing a serious downturn. But for the euro sell-off to expand, the news from the eurozone and China must become progressively worse, or the data from the US must gradually improve.
But is this possible? Analysts at Danske Bank believe peak pessimism about both China and the eurozone could be supportive.
In fact, data released this week showed that the IFO index for the German business climate remained stable in September at the previous month's level despite expectations of further deterioration. The business climate index fell from 85.8 to 85.7, which is better than expected at 85.1. At the same time, China's PMIs showed activity reaching its lowest levels, with other opinion polls and official data also pointing to improvement and strengthening expectations.
The basic assumption for Danske Bank is that both the Federal Reserve Bank and the European Central Bank have completed their respective interest rate-raising cycles and that focus will now shift to the matter of lowering interest rates. Given the relative assumptions about the state of the US and Eurozone economies and how the interest rate cut cycle could continue, Danske Bank maintains expectations for a decline in the euro against the dollar "based on relative terms of trade and real prices (growth prospects) and relative unit labor costs." And the bank is targeting a level of 1.03 over a 12-month time frame but expects to return to 1.08 over a one-month period in line with near-term recovery expectations.
After three months, target expectations were set at 1.07, before falling to 1.08 at six months and finally that one-year target of 1.03.
Expectations of the euro against the dollar today:
- There is no change in my technical point of view for the performance of the price of the euro currency pair against the US dollar EUR/USD.
- The general trend is downward, and its recent losses were enough to push the technical indicators towards strong saturation levels with selling.
- It is better to think about buying the minimum instead of thinking about selling operations.
- The support levels 1.0530 and 1.0475 will be the most important for that.
On the other hand, according to the performance on today's chart below, bulls should move towards the resistance levels 1.0770 and 1.0830 for the possibility of a breakthrough in the current downward trend.
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