FX analysts see improving yield support for the Euro ahead of Thursday’s ECB decision, with resistance at 1.1680-1.1700.
The Euro to Dollar (EUR/USD) exchange rate recovered from earlier losses to trade near 1.1626 on Tuesday afternoon, holding Monday’s gains as expectations of an ECB rate increase supported the single currency.
EUR/USD was virtually unchanged on the day at the time of writing, having risen 0.12% on Monday.
Scotiabank maintains a neutral-to-bullish short-term outlook, with improving interest-rate differentials supporting its assessment.
“The outlook for relative central bank policy remains supportive as we note the continued recovery in yield spreads with a narrow (2Y Germany-US yield spread only) fair value estimate currently around 1.1650.”
That estimate sits modestly above the latest exchange rate, although it measures only the relationship with two-year German and US yields rather than providing a broader price target.
ECB Guidance Could Determine the Next Euro Move
Scotiabank expects a widely anticipated 25-basis-point hike at Thursday’s ECB monetary policy meeting, alongside a relatively hawkish message on energy-driven inflation risks.
With an increase already priced in, the scope for further Euro gains may depend more on guidance about subsequent decisions, as we explored in our latest coverage of ECB expectations.
Options pricing has also become less defensive.
“Risk reversals are actually up on the day, suggesting a fading premium for protection against EUR weakness,” Scotiabank said.
The bank reported little currency reaction to Sunday’s German state election result, while stronger German trade figures were offset by a disappointing French deficit.
Scotiabank describes the medium-term trend as bullish following the recovery from late June, although its longer-term assessment remains range-bound and the RSI is only marginally above neutral.
“We see near-term support around last week’s lows near 1.1580 and see limited resistance ahead of the 1.1680/1.1700 range.”
Those resistance levels precede the higher 1.18-1.20 area in UBS’s Euro-Dollar outlook.
Thursday’s decision and accompanying guidance will test whether improving yield support is enough to carry the EUR/USD exchange rate towards 1.1700.
Our currency coverage draws on live market data, official economic releases and published bank research.
