We expect the continuation of the downward momentum in EUR/USD price performance until the reaction of the markets after today’s Federal Reserve announcement. The current losses of the euro against the rest of the other major currencies are still standing under the confirmation of the markets to stop the pace of tightening of the policy of the European Central Bank. JB Morgan Bank believes that its expectations for a decline in the price of the euro currency pair against the US dollar EUR/USD towards the support level of 1.05 may be "very optimistic".
Meera Chandan, forex strategy expert at JP Morgan, asks in the latest update to the forex currency market, "Is our target for the EUR/USD pair at support 1.05 too optimistic?"
The analysis comes alongside updated research that sees the investment bank considering a lower range for the EUR/USD exchange rate following the recent deterioration in economic data in the eurozone and the associated decline in the price of the single European currency. The analyst adds by saying: "The euro has no downside despite the countless doubts it faces, the cyclical divergence, the weak performance on the supply side, the softer terms of trade, the narrowing of price spreads, and the performance of the risk market - all point to further weakness of the euro ".
At the same time, JP Morgan models indicate that the fair value of the EUR/USD pair lies between 1.02 and 1.05 when viewed through the lens of relative growth dynamics between the United States and the Eurozone. In May, analysts at the investment bank confirmed that the EUR/USD pair had begun to undergo a regime change due to the marked decline in growth momentum in both the Eurozone and China, which was in stark contrast to the United States. And "hence our reliance on a bearish view on the euro at that time".
The EUR/USD had peaked at 1.11 in May but managed to touch 1.1257 by mid-July before the decisive selloff that we are currently witnessing began. The pair is now about 5.0% below its July high. And the declines come alongside a decline in Purchasing Managers' Indexes in the Eurozone - with the August issue pointing to growth falling to 0% - well below the European Central Bank's expectations of 1.5%.
The contrast in the relative growth momentum with the United States is glaring, given the continued flexibility in American data. At the same time, inflation is falling in both the United States and the Eurozone, "so it's not a source of difference in the same way."
Accordingly, JP Morgan maintains the year-end target at 1.05 for the euro-dollar, which is already among the lowest levels compared to the consensus, "but 1.02-1.03 levels can be tested if the regional weakness deepens." And for the fair value of the EUR/USD pair to reach the parity price (not the basic case for JPMorgan Bank yet), as the bank's analyst says that the Eurozone will need either another shock in energy prices or a pressure of 60-70 basis points in interest rate differentials against the euro. "Alternately, and perhaps it is more feasible, is to compress price spreads by 30 to 40 basis points, accompanied by a 2-3% drop in the euro as this matter develops."
Expectations of the euro against the dollar today:
- Until now, the general trend of the euro currency pair against the US dollar EUR/USD is still downward and may remain so until the reaction to the announcement of the American Federal Reserve Bank.
- These are levels where one might think about buying from them without risk, waiting for the moment of a rebound to the top.
- On the other hand, if today's announcement calms down the path of the US central tightening, the bulls may have a chance to move towards the 1.0820 resistance level, which is an initial breach of the general downward trend.
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