EUR/USD: Yield differentials and technicals favour the USD - Rabobank

According to analysts from Rabobank, fundamentals behind the EUR remain relatively solid, but they maintain the view that it could struggle to keep pace with the US Dollar amid a backdrop of higher US yields and reduced momentum in Eurozone economic activity. They lowered the EUR/USD 12 months forecast to 1.18. 

Key Quotes: 

“While higher US yields would provide the USD with another boost, the fact that the greenback has ignored the pull of higher rate spreads for months suggests that a break higher in US yields is not a pre-requisite for a stronger USD. More likely the USD may only need a trigger in order to catch up with last year’s widening of rate spreads.”

“After spending the last few months in a relatively narrow range, EUR/USD has now decisively broken below the upside trendline from the April 2017 low. By measuring the distance between the year-to-date high at 1.2555 and the lower end of the triangle pattern we have obtained a bearish target of 1.1905. That said, we also highlight a support area around the 61.8% Fibonacci retracement of the November-February rally at 1.1936. This may prove tough to penetrate before lower levels comes into focus. A strong rebound above the 1.2240 pivot is required to invalidate this short-term bearish scenario for EUR/USD. Coincidentally the DXY dollar index has also pushed above a key downside trendline. It is currently testing the 200 day simple moving average at 91.99. A break higher would signal the USD’s recovery is gaining further momentum.”

“Earlier this year we revised down our 12 mth forecast for EUR/USD from 1.28 to 1.21, we are now pushing the target to 1.18. This move is partly in recognition of the long term draw of interest rate differentials. The moderation in several European economic data releases in recent months, our expectation that the ECB will not hike rates before September 2019, the fact that the market had built up heavily long in EURs and the influence of technical factors are all contributing to the changed dynamic.”