Euro US Dollar Exchange Rate Forecast

Euro / US Dollar Monthly Technical Forecast

Monthly Chart

Prepared by Joel Kruger

The overall trend remains intensely bearish and we are now looking for the formation of a fresh medium-term lower top just over 1.3300 to be confirmed on an eventual break back below the 2010 lows by 1.1880 further down. Any rallies towards 1.3000 should be aggressively sold, with only a break back above 1.3335 to negate structure and give reason for rethink.

Euro / US Dollar Interest Rate Forecast

Stagnant US Federal Reserve and European Central Bank interest rate expectations have had seemingly little effect on EURUSD price action, and instead the pair has moved virtually tick-for-tick with the US S&P 500 and other risky assets. Overnight Index Swaps currently predict that both the Fed and ECB will leave rates effectively unchanged in the coming 12 months. Barring a substantial shift in official rhetoric and/or improvements in economic data, we expect this to continue to be the case through the foreseeable future.

Lack of emphasis on interest rates themselves does not diminish the importance of sound economic data, however. For the US Federal Reserve much of the focus remains on the potential for further Quantitative Easing measures. Thus it will be important to watch for steady improvements in US economic data; else the Euro may continue to recover and set new highs against its US counterpart.

Euro / US Dollar Valuation Forecast

EURUSD Valuation Forecast: Bearish

The Euro remains overvalued against the US Dollar, tracking 11.5 percent above its PPP-implied exchange rate. The argument for a continued correction in the medium termappears compelling. With both the Fed and the ECB likely to remain on the sidelines, the strong correlation between EURUSD and overall risk sentiment is likely to exert downward pressure amid increasing evidence of a global economic slowdown in the second half of the year. Indeed, the JPMorgan Global PMI gauge of economic activity dropped to the lowest in six months in August. On balance, the bias remains bearish.

What is Purchasing Power Parity?

One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by Bloomberg. We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar.