Euro-dollar targets 1.1705 as USD offensive keeps euro retreating


– EUR / USD target lowered from 1.1770 to 1.1705 at Credit Suisse
– Inflation risks in the United States keep the USD in the spotlight and the EUR on the defensive
– Others say the drop is limited before the late 2021/2022 rebound

Image © European Union – European Parliament, reproduced under CC license.

  • Reference rate EUR / USD at publication:
  • Location: 1.1811
  • Bank transfers (indicative guide): 1.1390-1.1480
  • Specialist money transfer rate (indicative): 1.1705-1.1730
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The Euro-dollar exchange rate retreated from levels above 1.18 in the penultimate session of the week, but is expected to probe below over the next few days and could reach levels as low as 1.1705, according to new objectives of Swiss credit.

The single European currency paused last week when rising after the European Central Bank (ECB) announced a new inflation target and a new monetary policy strategy, which may have been less aggressive than some in the anticipated and favorable euro market due to the lesser degree of additional monetary stimulus likely needed to y achieve rather than a more ambitious goal.

But inflation figures in the United States showed that annual price growth rose again above 5% on Tuesday and eventually saw the single currency collapse again, leading to another foray below 1.18 and now apparently the trajectory of euro-dollar rates tilted downward in the short term at least. .

“However, some recent developments seem to reinforce the perception of a ‘floor’ of the US dollar against low-yielding currencies. These include a strengthening of the US CPI data and, to a lesser extent, the review of the ECB’s strategy, ”said Shahab Jalinoos, head of foreign exchange strategy at Swiss credit.

“Expectations regarding the implementation of the latter in the next ECB rate decision on July 22 create an additional marginal risk of a tactical fall in the EURUSD: we are thus lowering the target level of our current short position in l ‘EURUSD from 1.1770 to 1.1705 “, adds Jalinoos.

EURUSD daily

Above: Euro-dollar rate displayed at daily intervals with Fibonacci retracements of the 2020 upturn.

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Analysts’ expectations for the euro have been dashed since mid-June, when the Fed first signaled it was poised to debate the appropriate time to end its quantitative easing program and that it could raise interest rates sooner than expected.

The minutes of that meeting last week revealed that an announcement on tapering could come at any time between July and the end of the year and that the outlook for borrowing costs depends on the extent to which the inflation continues to exceed the Fed’s average 2% target, although analysts Commercial bank say that if met, the Fed’s market expectations next year and into 2023 may soon prove to be a favorable influence on the euro-dollar rate.

The bank forecasts a year-end around 1.20 EUR / USD before rising to 1.26 when the curtain closes in 2022.

“The now expected early ‘take-off’ was used by the market as an opportunity to downgrade long-term Fed funds rate expectations,” writes Ulrich Leuchtmann, head of foreign exchange strategy at Commerzbank, in a note. recent.

Commerzbank CPI

Above: Commerzbank inflation forecast and chart showing the “fair value” range based on purchasing power parity theory.

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“We consider that a further significant appreciation of the USD is unjustified, at least if the scenario of the evolution of inflation and key interest rates taken into account by the market does not change. EUR-USD around 1.18 should therefore be a range in which a medium-term market equilibrium can be expected under current conditions, ”adds Leuchtmann.

Decade highs for US inflation rates have made some in the market and many Americans themselves nervous, cultivating in the process investors’ expectation that the Fed will be forced to raise interest rates towards the end of next year in order to curb the rise in prices.

For its part, the Fed has maintained its position that these inflation rates are temporary and that they should subside on their own over the coming year rather than requiring a rate response. interest to be mastered.

“I would say we can see it. [pause] It won’t take us forever to be able to see it. And if we find that inflation expectations are rising and inflation is on track to exceed our targets, and it is likely to send us into a period of high inflation, we will use our tools to bring it back. inflation at 2%, ”Fed Chairman Jerome Powell told Congress on Wednesday.

EURUSD Weekly

Above: Euro-dollar rate shown at weekly intervals with the US dollar index.

“Honestly, it would be a mistake to do this at a time when we really believe, and pretty much all forecasters believe [inflation] will shrink as the economy reopens, frankly it would be a mistake to act prematurely, ”Powell said in response to Representative Frank D Lucas of the House Financial Services Committee.

The Fed cites, among other things, supply shortages of certain components for manufacturing industries, pressure on capacity in service industries resulting from layoffs inspired by a pandemic for current levels of inflation observed in the United States as well as Statistical base effects resulting from the extremely low levels of inflation observed during much of 2020, when many economies were effectively closed.

Reduced prices in 2020 could lead to high inflation in 2021, even with prices of goods and services simply returning to levels close to their pre-pandemic norms, but as time passes last year and its low price levels will drop from the base year. comparison period, which would generally have the effect of reducing inflation in the same way it was increased this year; hence the Fed’s insistence that inflationary pressures are “transitory”.

“The market assumes a much earlier and more aggressive ‘take-off’ for the Fed than for the ECB. Once both are corrected, a net negative argument for the USD remains. Through long-term valuation measures, the euro remains significantly undervalued against the dollar. Anything that narrows the difference between the outlook for the Fed and the ECB is therefore a positive argument for the euro, ”says Leuchtmann of Commerzbank.

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