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Euro / Dollar Rate: "Back to Bearish" says Julius Baer, Eyeing 1.1040
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Euro / Dollar Rate: "Back to Bearish" says Julius Baer, Eyeing 1.1040
Mar 22, 2024 2:17 AM

Image © Adobe Images

The Euro has resumed its downtrend against the Dollar says a technical analyst at Swiss Bank Julius Baer, a finding that comes just days ahead of the European Central Bank's first policy decision of 2022.

The Euro has fallen to 1.1153 ahead of the weekend, its lowest level since June 2020, marking an extension of a long running downtrend.

"EUR/USD breaks below November lows and resumes downtrend, likely to decline to 1.1040. Downgraded back to Bearish," says Mensur Pocinci, Head of Technical Analysis at Julius Baer.

"The EUR/USD has moved sharply lower over the past two days, printing new 52-week lows, as it was not able to defend the lows of November," he adds.

Image source & credit: Bloomberg Finance L.P., Julius Baer.

"Looking at the chart, we can see next key support at 1.1040, but it is more likely that the downtrend will extend further, as the pattern remains weak and the currency pair cannot see a sustainable consolidation.

A technical turn lower in the Euro comes just days ahead of the European Central Bank's February 03 policy meeting, where the central bank will be questioned on the prospect of a 2022 rate hike.

Money market pricing shows investors are now anticipating a rise in the ECB's basic lending rates by December, in recognition of rising Eurozone inflation levels.

But the ECB's own inflation projections are likely to maintain inflation will dip back to its 2.0% target level over a two-year horizon, which means there is no reason for the ECB to rush into a rate hike.

"Markets are increasingly worried that the ECB is behind the curve, but we are less concerned. 18bp of rate hikes priced in by Dec-22 looks too much, we think," says Giovanni Zanni, Chief Euro Area Economist at NatWest Markets.

EUR/USD reference rates at publication:

Spot: 1.1128High street bank rates (indicative band): 1.0739-1.0816Payment specialist rates (indicative band): 1.1030-1.1072Find out more about market-beating rates and service, hereSet up an exchange rate alert, hereHow the traditionally 'ultra-dovish' ECB handles the market's expectations for an earlier-than-guided rate hike could provoke foreign exchange market moves.

Zanni says the first step the ECB must take before hiking is to reduce the scale of its quantitative easing programme, which has not yet even begun.

"This implies significant bearish pressures for the long-end of the curve," says Zanni.

"There will certainly be more focus on EUR and GBP next week with the ECB and the BoE meeting. The BoE is widely expected to hike but the ECB remains far off that point," says Derek Halpenny, Head of Research for EMEA Global Markets at MUFG.

MUFG see little prospect of the ECB drastically altering course and expect ECB President Christine Lagarde to maintain a familiar approach to policy, cautioning that while inflation is rising it will fall back again.

"We expect EUR to remain under downward pressure over the coming months," says Halpenny.

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The Euro is also tipped to struggle by strategists at Swiss bank Credit Suisse, however they also warn the currency could make a material recovery should Eurozone wages reach 3.0%.

Shahab Jalinoos - Global Head of FX Strategy at Credit Suisse - says he and his team are holding a "core bearish EURUSD view", based on the ECB remaining "very dovish".

In fact, the ECB appear "almost untouched by high realised inflation which has so clearly been a pivotal factor elsewhere," says Jalinoos.

But, "the main risk to our ongoing EUR bearishness has to be the possibility that the ECB changes tack in a hawkish direction with the kind of urgency that the Fed, the BoE and now even the MAS is showing," says the analyst.

What would prompt such a change in tact?

The ECB's chief economist Philip Lane this week gave a strong hint when he said the key metric to watch going forward would be wage growth, specifically whether it will be able to sustain Eurozone inflation above the ECB's 2.0% target over the longer-term.

"So far, we do not see a big response of wages. We do expect a response of wages but what is critical is how big," said Lane in an interview.

In the third quarter of 2021, Eurozone wages rose by 2.5% and by 2.9 % in the EU according to official figures, compared with the same quarter of the previous year.

Lane said that in the euro area, for inflation to be around 2% and allowing for a typical increase in labour productivity of about 1%, then wages should be growing around 3% a year in the euro area on average to be consistent with the 2% target.

"We are not, right now, seeing wage increases in that zone. But of course, we will continue to look at this throughout the year," said Lane.

Lane said that unless wage growth can reach these levels it is unlikely inflation can sustain a 2% rate and will instead fall below that level again in 2023 and 2024, thereby requiring ongoing ultra-easy monetary conditions.

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