EURUSD: Euro US Dollar Exchange Rate Forecast
Prepared by Jamie Saettele
Having broken through the resistance line that extends off of the 2008 and 2009 highs, a longer term change in trend must be considered. What’s more, RSI (weekly 13) confirms the new high. Resistance should be strong up to 14579. The 61.8% retracement of the entire decline form 16000 is at 14450 and the 2010 is 14579. The area surrounding 14500 has been important since 2007, serving as support and resistance. Near term expectations are for consolidation and weakness from 14500 before continued strength. 14250 is support. A longer term objective is 15280, which is the 100% extension of the 11875-14282 rally. This level intersects trendline resistance in June. In summary, look lower over the next few weeks and then higher.
Euro / US Dollar Valuation Forecast
EURUSD Valuation Forecast: Bearish
The Euro continued to push into overvalued territory through March amid firming bets the ECB was on the cusp of raising interest rates. With tightening now just around the corner, its ability to continue driving the single currency higher doesn’t look like a given. Indeed, it is worthwhile to remember that the ECB’s last rate hike was in July 2008, the same month that the single currency topped out above 1.60 at the onset of the Great Recession, while the first cut didn’t materialize until the following October when the Euro had already fallen by over 10 percent. This tells us that rate hikes in and of themselves are not enough to keep the rally moving in the presence of significant headwinds, and the Euro seems to have that in ample amounts considering a final decision on a near-term (pre-2013) strengthening of the bailout framework for debt-strapped periphery countries has been pushed out to June. This opens the door for weakness as Portugal nears a rescue and jitters about Spain – a country arguably too big to be bailed out within the scope of the current EFSF – continue to mount. This opens the door for selling through the second quarter, helping to narrow valuation gap promising the bears an attractive selling opportunity near current levels.
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.
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