UBS are sellers near 1.10Westpac says EURUSD above 1.08 looks overdoneBut City Index says 1.10 is a potential target

Image © Adobe Images

The Euro to Dollar exchange rate had its best week since July last week, but analysts note the advance leaves the Eurozone's single currency looking overextended and at risk of setback over the coming days.

The bulk of the previous week's gains followed Tuesday's U.S. inflation figures, which came in below expectations and furthered the argument that the Federal Reserve could afford to end the interest rate hiking cycle and look forward to a future of cuts.

The boost to global market sentiment and falling U.S. yields all aided Euro-Dollar to a high at 1.0895, but gains have since faded.

"The EUR/USD as not shown any desire to move much in either direction. The buying momentum has faded and will probably need fresh macro stimulus to drive it further higher from here," says Fawad Razaqzada, an analyst at City Index.

"Still, given the interim higher highs and higher lows, and despite the struggles in the second half of the week, we are expecting any short-term dips back to support to find buyers," adds Razaqzada.

He explains Euro-Dollar is witnessing a bullish consolidation that has allowed short-term 'overbought' conditions to be worked off.

"On the upside, the 50% retracement level just below the 1.09 handle is the middle of the almost year-long consolidation range that the EUR/USD has been stuck inside. Should the bulls reclaim this zone, a move up to 1.10 handle could be on the cards next," he says.

Above: EURUSD technical insights from City Index. Track GBPUSD with your own custom rate alerts. Set Up Here.

But analysts at UBS join those who say the move higher in Euro-Dollar has extended too far and they make selling the exchange rate as a "trade of the week".

"We like to sell the upside in EURUSD at 1.10 over the next one month," says Dominic Schnider, an analyst at UBS. "The move up in EURUSD has been outsized, in our view, from an inflation surprise and relative rate perspective."

Image courtesy of UBS.

Richard Franulovich, a strategist at Westpac Bank says any Euro-Dollar setbacks towards 1.08 will likely find support over the coming days.

"But until rebounds in key regional leading indicators show up in clearly stronger hard data, EUR/USD upside beyond 1.10 likely proves a tough slog and the USD-leg likely does much of the heavy lifting," he adds.

Franulovich reckons Euro-Dollar above 1.08 "looks overdone" relative to Bund-Treasury yield spreads, which are still not moving decisively in the EUR's favour.

U.S. drivers, such as softer labour and inflation data, have been the primary determinants of EURUSD direction over the past month, but this week sees only second-tier data out of the U.S., which could limit EURUSD volatility.

"If you ignore PMIs on Friday (which Americans will). Existing home sales, Philly Fed, durable goods orders, and University of Michigan survey data are all second-division stuff," says Kit Juckes, FX analyst at Société Générale.

We might have to wait for the first half of December for the USD side of the equation to light up; "will see plenty of data points to disturb Christmas lunches: ISM on the 1st, NFP on the 8th, CPI on the 12th, FOMC on the 13th and retail sales on the 14th," says Juckes.

Where Euro-Dollar ends the week could rest with how the Eurozone PMI's for November land at 09:00 GMT on Thursday.

The Eurozone manufacturing PMI is expected at 43.5 in November, up from 43.1 in October, and services is seen at 48, up from 47.8. The composite reading is expected to land at 46.7, slightly higher than 46.5 previously. Any undershoot could further cap Euro-Dollar in the 1.08 region in the near-term.

"We think the flash Eurozone PMIs are unlikely to signal a rebound, even though lower oil prices might provide a little boost. The German ifo is also unlikely to show more positive momentum, as it usually reflects the equity market mood and the survey took place when stocks were weak," says Dominic Schnider, a strategist at UBS. "So, for now we believe consolidation is more likely than further gains for the EUR."

Image courtesy of Nordea Bank.

"The last PMIs were truly poor and showing both lower activity for manufacturing and services. The shape of the Euro economy is weakening, but with a still too high inflation rate, cuts are unlikely to come as fast as markets currently expect. There is a chorus of ECB speakers out next week with Lagarde scheduled to speak twice," says Dane Cekov, an analyst at Nordea Bank.

Regarding the ECB speakers, Chief Economist Philip Lane speaks on Monday at 05:00 GMT, and President Christine Lagarde speaks at 16:00 on Tuesday. Isabel Schnabel is due later in the day at 17:15.

Frank Elderson speaks at 14:10 on Wednesday and Schnabel again at 19:30 on Thursday. Lagarde is due her second talk at 09:00 on Friday and De Guindos rounds the week off at 12:00.