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USD: Crucial technicals turn negative – ABN AMRO

Georgette Boele, analyst at ABN AMRO, suggests that EUR/USD has been in a tight range this year and the main reason for this lack of direction in EUR/USD is that both currencies don’t look particularly attractive.

Key Quotes

“On the one hand, weaker eurozone growth, the prospect of monetary policy easing by the ECB and political challenges in Italy weigh on the euro. On the other hand, the prospect of aggressive Fed easing is weighing on the US dollar. Changes in investor sentiment are also playing a crucial role. The prospect of Fed rate cuts has a negative impact on the dollar when investor sentiment is more constructive. This is because in such an environment there is lower safe haven demand for the dollar.”

“Last week saw a combination of these different and opposing dynamics. At the start of the week, dovish comments from ECB’s Mario Draghi pushed EUR/USD below 1.12. But a day later the Fed surprised even more on the dovish side, resulting in a sell-off of the dollar across the board. The Fed’s communication triggered expectations of the possibility of a 50bp rate cut in July. This boosted general investor sentiment. The combination of optimistic investor sentiment and the narrowing of yield spreads between the US and other countries sent the dollar lower. EUR/USD broke above the 200-day moving average and the US dollar index dropped below this technical level last Friday.”

“USD/JPY has already been below this level since the start of May. These developments clearly improve the overall technical outlook for EUR/USD and the odds have risen that the US dollar has entered a multi-year decline. We think that currently the market is too aggressive in pricing in rate cuts by the Fed, and our new ECB view of rate cuts is not fully anticipated by financial markets. If our view plays out, EUR/USD could easily drop below the 200-day moving average again in the near-term.”

“We therefore maintain our year-end target for EUR/USD at 1.12. However, we think US dollar weakness is here to stay versus the Japanese yen. Narrowing yield spreads between the US and Japan and waves of risk aversion should support the yen versus the dollar. We have a year-end forecast of 100 in USD/JPY.”

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