Bloomberg: skeptics seek confirmation that the euro growth is not only due to the dollar decline

Source: Bloomberg

Author: Naomi Tajitsu

Article: Original article

Date of publication: Thursday, November 17, 2022

Investors, taken by surprise by the euro's sharp rebound, remain skeptical that the rally has a solid base. 

With a massive dollar sell-off following signs of slowing U.S. inflation, the euro rose 5% against the U.S. dollar to its highest level since July. Data coming from UBS Global Wealth Management, Russell Investments and Insight Investment show that the euro is unlikely to strengthen.

The euro may find some support, if Europe escapes energy shortages this winter, with the ECB being hawkish. But investors still need to be mindful of the macroeconomic fallout from record inflation.

Dean Turner, economist at UBS Global Wealth Management, said that the euro's growth has run out of steam at the moment. The situation is unlikely to change until the economic data are stronger than previously expected, or the energy shortage issue is addressed. The EURUSD is expected to struggle past the 1.04 level for the rest of the year. However, experts are not sure about the euro's rally being stronger. 

The last phase of the euro's gains came due to the massive dollar sell-offs. Investors are eager to see whether the trend takes root before making big bullish bets on the euro. 

According to Van Luu, head of currency strategy at Russell Investments, market participants are cautious, waiting for the dollar to peak. The expert supports skipping a few percent in a rally of the euro or other currency against the dollar.

From a technical perspective, the euro needs to break above the 200-day moving average at 1.04 in order to move higher. Moreover, a stronger resistance level is looming at 1.0578, i.e. a key Fibonacci retracement level of the entire euro decline since mid-2021, when the Fed started to signal its intention to hike rates.

Bullish calls on the dollar are renewed. Market positioning and sentiment barometers indicate that traders are now bearish again on the euro following its positive outlook last week.

Despite the euro’s long positions rising to its highest level since mid-2021, some investors may be looking for more proof to support aggressive dollar selling.

It is important to understand the underlying trend. Thus, the dollar selling after its 6% fall is typically regarded as a non-profitable strategy. This is reported by Francesca Fornasari, head of currency solutions at Insight Investment.

Forecast: EURUSD is expected to decline