Euro/US Dollar Technical Forecast
Monthly Chart
Prepared by Sarah Abbas
While a head and shoulders top may be forming from
the November 2010 top, don’t be surprised to see the EURUSD hold up for
at least another month. Recent COT data shows that commercials are long a
record number of contracts and non commercials (large speculators) are
nearly as short as they were at the 2010 bottom. One would expect
positioning to moderate before a true breakdown occurs. Resistance this month is 13565 and 13855. The obvious 13150 is support with a break exposing 12850 (January and 2011 low).
Euro / US Dollar Interest Rate Forecast
|
Currency, Central Bank
|
Euro,European Central Bank
|
US Dollar, US Federal Reserve
|
Net EURUSD Spread
|
Signal
|
|
1-Year Expectations(Basis Points)
|
(22)
|
5
|
(27)
|
Bearish
|
|
Yield in 1 Year(Percent)
|
1.03
|
0.30
|
0.73
|
Bullish
|
Euro/US Dollar Interest Rate Trading Bias: Neutral
Analysts predict that the
European Central Bank will cut interest rates by a modest 22 basis
points in the coming 12 months, while the US Federal Reserve will leave
interest rates unchanged. Relatively neutral yield expectations give
little reason to call for significant EURUSD declines. Yet to focus on
interest rates alone misses the real driver of recent EURUSD volatility:
European fiscal crises.
It seems as though European
governments are on the cusp of announcing the next significant
breakthrough in fiscal bailouts. Yet we’ve all heard this story before,
and the real truth is that substantial changes remain difficult.
We remain overall bearish the Euro against the US Dollar from a fundamental standpoint. Yet shorter-term sentiment analysis suggests that the EURUSD could rally through December before falling further in the New Year.
Euro / US Dollar Valuation Forecast
EURUSD Valuation Forecast: Bearish
Source: Me and Ze Capital Management
The Euro
remains significantly overvalued against the US Dollar, trading 2175
pips or 16.23 percent above its PPP-implied fair exchange rate. The
greenback’s primacy as a safe haven as investors turn away the
intervention-hindered Japanese Yen and Swiss Franc calls for a deeper
correction of the value gap ahead as the Eurozone debt crisis continues
to weigh on market-wide risk appetite. Importantly, even if the currency
bloc’s policymakers finally craft a functional scheme to relieve
sovereign stress – most likely along the lines of an idea floated by
newly-minted ECB President Mario Draghi that proposes following a
credible plan for deeper fiscal integration with an expanded bond-buying
program from the central bank to reign in borrowing costs – the Euro is
likely to suffer nonetheless. Indeed, austerity measures are weighing
heavily on growth, meaning the ECB is likely to continue cutting
interest rates. Any QE-style program that emerges as part of the debt
crisis relief deal would naturally reinforce this trajectory.
What is Purchasing Power Parity?
One of the
oldest and most basic fundamental approaches to determining the “fair”
exchange rate of one currency to another relies on the concept of
Purchasing Power Parity. This approach says that an identical product
should cost the same from one country to another, with the only
difference in the price tag accounted for by the exchange rate. For
example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair”
EURUSD exchange rate should be 1.20. For our purposes, we will use the
PPP values provided annually by Bloomberg. We compare these values to
current market rates to determine how much each currency is under- or
over-valued against the US Dollar
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