Is the rally in the European currencies justified and can it be sustained? This is what every trader is thinking at this time and we believe that it’s a very interesting question. The truth is that the decline of the Dollar in recent times has allowed both the Euro and the Pound to record gains against the US currency but what should we expect for the coming weeks?
The reason behind the decline of the Dollar has been the slowdown of the US economy and the chance that the Fed would delay raising rates. For those that thought that June was a possible date for the Fed to do so the disappointment is understandable but we have explained that this has to be the minority. We continue to believe that the Fed is on course to tighten their interest rate policy probably on the September meeting.
As such we view the recent gains in the Euro and the Pound a bit exaggerated and most importantly not in touch with the fundamental outlook of the currencies. With the Euro now trading above the 1.1200 barrier and the Cable retreating to 1.5350 we believe that a serious turn to reality should come.
The liquidation of the extremely aggressive pro-Dollar positions was reasonable ahead of the Fed meeting that made it clear that a June rate hike is a far-fetched possibility but now these rallies could come under threat. As we mentioned above little has changed in the fundamentals of both the Euro-zone and the UK economy so the rallies have been mainly sentiment-fuelled.
Looking ahead we most likely expect a consolidation attempt and range-trading for the Euro and the Cable over the next sessions. Traders will turn their attention to the Non-Farm Payrolls report next Friday so we expect reduced volatility over the next days. From a technical point of view, as long as the Euro remains above the 1.1100 support area and the Cable holds above the 1.5250 floor we shouldn’t expect much of a price action.
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