Commerzbank HQ, Frankfurt. © Andre Douque, CC licensing.

- EUR draws buyers and bulls from woodwork despite economy concerns.

- Westpac tells clients to buy EURUSD as other analysts forecast gains.

- But there's a risk growth concerns will see ECB renege on policy pledge.

The Euro-to-Dollar rate is continuing to draw buyers out of the woodwork even in the face of mounting concerns over the bloc's economy, with some suggesting the exchange rate could return to levels last seen in the summer of 2018 over the coming weeks.

Analysts at Westpac advocated on Wednesday that clients look to buy the exchange rate around the 1.1350 level over coming days, and target a move up to above the 1.16 threshold during the weeks ahead.

Other analysts, including those at Japan's MUFG and Germany's Commerzbank are also forecasting a positive performance from the Euro, undeterred by recent dire economic news, with the former suggesting there is scope for even further gains than Westpac has acknowledged.

"The USD’s recent pullback, triggered by Chair Powell’s comments that the Fed is flexible and patient, along with weaker PMIs signaling a waning of US growth outperformance, has further to run," says Richard Franulovich, head of FX strategy at Westpac, in a note to clients. "Upcoming Fedspeak should underscore market conviction that Fed policy normalisation is not a pre-set auto pilot path."

The Federal Reserve (Fed) told markets in December that interest rates are likely to rise at a slower pace in 2019 than markets had previously anticipated, given developments in the global economy and financial markets that are posing a threat to the U.S. growth outlook.

This was widely perceived as a death knell for the days of U.S. economic exceptionalism, which had enabled the Fed to raise rates four times last year as economies elsewhere slowed and the respective central banks stood pat.

With that 2018 economic and interest rate dynamic being the source the Dollar's strength last year, and the EUR/USD rate's weakness, December's about-turn by the Fed has dented the U.S. greenback and thrown a lifeline to the Euro. This is what's drawn Westpac out of the woodwork as a buyer.

Above: Euro-to-Dollar rate shown at daily intervals.

The Euro-to-Dollar rate was quoted -0.04% lower at 1.1452 Wednesday and is down by -0.11% for the 2019 year so far. It closed 2018 around current levels after having fallen almost 5% earlier in the year.

Above: Euro-to-Dollar rate shown at weekly intervals.

Despite their bullish trade, Franulovich and the Westpac team are not blind to the recent dire economic news emerging from Europe itself. Franulovich warned Wednesday that this could ultimately lead to a shift in the European Central Bank (ECB) monetary policy stance that dents the single currency.

"ECB minutes could reveal a more cautious Bank noting risks of a more protracted growth slowdown and so accommodation and guidance on rate hikes could potentially be extended beyond “end of summer”, Franulovich writes.

The single currency's appeal to investors is currently hinged on expectations the ECB will begin raising its interest rate late in 2019. But in order for it to do this the growth outlook must remain consistent with a gradual return of inflation toward its target of "close to but below 2%".

Eurozone inflation fell sharply in December, from a downwardly-revised 1.9% to just 1.6% when markets had looked for a retreat from the previously published number of 2% to 1.8%. Core inflation was unchanged at 1% in December.

Recent economic data has also cast further doubt over the outlook for growth and inflation in Europe. German industrial production fell -1.9% in November when markets had looked for it to grow by 0.3%.

Moreover, October's -0.5% decline was revised higher to -0.8%, which leaves overall industrial production down some -4.7% for 2018. That was the largest annual decline since the financial crisis of 2008 and has prompted some to speculate the German economy could already be in a "technical recession.

Analysts at MUFG say a strong rebound in German industrial production is necessary for the December month if the economy is to avoid a recession, but that the change in Fed policy will matter more to the currency market at the moment than concerns about industrial production.

"EUR/USD was quite resilient yesterday on the IP news from Germany," says Fritz Luow, a currency analyst at MUFG. "We expect EUR/USD resilience to continue as the shift in Fed policy is viewed as more significant than the ongoing weakness in German industrial data."

Luow and the MUFG team are forecasting that the Euro will end the first quarter at 1.16 against the Dollar, but also flag in their monthly update to clients that the exchange rate could go as high as 1.21 before then, depending on the overall level of the U.S. Dollar during the intervening period.

They aren't the only ones looking for a leg higher in the exchange rate as technical analysts at Commerzbank have been flagging scope for a Euro-to-Dollar rate recovery all week.

"EUR/USD is consolidating and remains well placed to challenge and break above the 1.1500 resistance," writes Karen Jones, head of technical analysis, in a briefing to clients Wednesday. "The market faces tough overhead resistance in the 1.1500 zone but upside risks are growing longer term and a close above here (preferably a weekly close) would trigger a recovery to the 1.1623 October high and the 1.1632 200 day moving average (MA). Slightly longer term we target 1.1795, the 55 week ma."

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