A retreat towards 1.1500 support has turned the EUR/USD forecast more cautious, even as bond yields offer the euro some protection.
The Euro to Dollar (EUR/USD) exchange rate slipped to 1.1552 on Monday, down 0.41%, as risk aversion outweighed support from interest-rate differentials.
Scotiabank’s near-term assessment is neutral to bearish after last week’s recovery raised hopes of a move towards 1.1700.
“We see major support at 1.15 and see limited near-term resistance ahead of 1.1650.”
Its assessment follows a sharp deterioration in the relative strength index, which briefly exceeded 70 in late August.
“The latest decline has dragged momentum into the low 40s, reflecting spot’s decline to its 50 day MA at 1.1531.”
That moving average was being tested when Scotiabank assessed EUR/USD at 1.1539, before the pair recovered some ground later in the session.
Yields suggest a firmer euro
The bank sees a gap between the exchange rate and the level implied by two-year German and US bond yields.
“Sentiment is dominating as yield spreads remain relatively well supported, offering a narrow FV estimate based solely on yield spreads (2Y Germany-US) at 1.1633.”
That fair-value estimate is a model reference, not a dated forecast that EUR/USD will recover to 1.1633.
Scotiabank also notes: “Hawkish comments from the ECB appear to be intensifying in response to the latest rise in energy prices, with Executive Board member Schnabel characterizing the increase as ‘quite concerning’.”
Germany’s outlook comes back into focus with Tuesday’s ZEW release:
“Fundamental releases have been limited and we continue to highlight the importance of Tuesday’s ZEW investor sentiment survey, a noted leading indicator for industrial production (by about 12-18 months).”
We think a stronger reading would help the euro’s recovery case, although Monday’s decline shows that supportive yields alone have not overcome demand for the dollar.
Our currency coverage draws on live market data, official economic releases and published bank research.