EUR/USD closes in on 1.0900 to end weekEstablishing a 1.08-1.12 range short-termECB, Fed, oil & fiscal policy all key drivers

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The Euro to Dollar exchange rate slipped lower toward the round number of 1.09 ahead of the weekend and could be in the process of establishing a rough 1.08 to 1.12 short-term trading range, according to strategists at Credit Suisse and TD Securities.

Europe’s single currency broke briefly above the 1.11 handle in the moments immediately after the European Central Bank (ECB) set out on Thursday the further “conditional” steps it could take to normalise its monetary policy settings during the months ahead.

But the Euro-Dollar rate rate was quickly overwhelmed by a strengthening greenback and not even falling oil prices were able to prevent it from retracing lower into Friday, although a tepid increase in the price of oil may also have weighed on the single currency in the final session of the week.

“The process of ECB normalization and convergence with the BoE support our tactical long EURGBP view. That said, EURUSD needs a string of positive news flow on the ECB/Fed, fiscal support, and oil prices to break through 1.12. We don't think we're there yet, supporting the emergence of a 1.08-1.12 range for now,” says Mark McCormick, global head of FX strategy at TD Securities.

Above: Euro-Dollar rate shown at 15-minute intervals and pictured alongside inverted (upside down) oil price and U.S. Dollar Index.

EUR/USD reference rates at publication:

Spot: 1.0920High street bank rates (indicative band): 1.0538-1.0614Payment specialist rates (indicative band): 1.0822-1.0865Find out more about market-beating rates and service, hereSet up an exchange rate alert, herePrevious to the ongoing Russian invasion of Ukraine the correlation between Europe’s single currency and the price of oil had been positive, meaning they would often move in mostly the same direction.

However, the intervening surge in energy costs is an outright headwind to economic growth that will also result in more currency being sold on the market in exchange for U.S. Dollars, meaning that recent commodity price developments are a double-barreled burden for the single currency.

“On another day - i.e. pre-war - EUR/USD might have enjoyed lasting gains on ECB hawkishness. Yet it looks unlikely that an ECB, barely matching Fed tightening, can generate a stronger Euro in the face of heavy terms of trade losses,” says Chris Turner, global head of markets and regional head of research for UK & CEE at ING.

“We think the surge in energy prices has probably damaged the Euro's fundamental fair value,” Turner and colleagues said on Friday.

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Thursday’s policy decision saw the ECB bring forward to June, from October, the date at which its Asset Purchase Programme would reduce its monthly government bond purchases to €20BN and formally acknowledged that its interest rates could rise in the near future.

However, everything about the outlook for ECB policy is highly “conditional” on how the Eurozone economy fares during the months ahead and in the meantime, the Federal Reserve (Fed) is widely expected to lift its own interest rate on what could potentially be multiple occasions.

“Immediate resistance is seen at the 13-day exponential moving average at 1.1095 and we will look for this to try and cap for the unfolding of a 1.0825/1.1095 range,” says David Sneddon, head of technical analysis trading strategy at Credit Suisse.

“A close above 1.1095 can see a deeper recovery to 1.1120 and then a cluster of Fibonacci retracement and price resistances at 1.1143/51, but with fresh sellers expected here,” Sneddon and colleagues said on Thursday.

Source: Credit Suisse