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Euro - US Dollar Technical and Fundamental Forex Forecast for May

Euro - US Dollar Technical and Fundamental Forex Forecast for May

2011-05-12 00:21:00
Joel Kruger, David Rodriguez,
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Euro / US Dollar Monthly Technical Forecast

5/11/2011Weekly Chart

euro_technical_fundamental_forecast_may_body_eur.png, Euro - US Dollar Technical and Fundamental Forex Forecast for May

Prepared by Joel Kruger

A closer look at the weekly chart shows the market confined to a longer-term downtrend off of the record highs from 2008, with the market now potentially looking to carve out a fresh lower top by 1.4940 ahead of the next major downside extension. Key support comes in by 1.4155, and a sustained break below this level would end a sequence of shorter-term consecutive higher lows this year and accelerate declines. A strong bearish outside week and the start of May provides additional bearish evidence and ultimately, only back above 1.5000 would give reason for concern.

Euro / US Dollar Interest Rate Forecast

Currency, Central Bank

Euro,European Central Bank

US Dollar, US Federal Reserve

Net EURUSD Spread

Signal

1-Year Expectations(Basis Points)

74

32

43

Bullish

Yield in 1 Year(Percent)

1.99

0.57

1.43

Bullish

euro_technical_fundamental_forecast_may_body_Picture_4.png, Euro - US Dollar Technical and Fundamental Forex Forecast for May

A significant pullback in European Central Bank interest rate forecasts preceded a similarly sharp correction in the Euro/US Dollar pair, and continued corrections would favor further losses. Markets had previously priced in as much as 140 basis points of ECB rate increases through a twelve month period. Yet surprisingly neutral rhetoric from ECB President Jean Claude Trichet put a real damper on hopes and forced a noteworthy EUR correction. And though it’s unlikely that US Federal Reserve interest rate expectations improve through the foreseeable future, a relative improvement in spreads could support the US currency.

Outside of the interest rate space, it will be important to watch broader financial market risk sentiment and flight to safety flows in forex pairs. The US Dollar remains an important safe haven in times of market stress, while the euro has tended to rally amidst strong performance in the Dow Jones Industrial Average and other key ‘risk’ barometers. Recent corrections in the Dow and other key assets warn that the US Dollar stands to gain further on sell-offs in equities.

It will be important to watch any and all developments in the Greek sovereign debt crisis and whether a potential debt restructuring could derail confidence in the single currency zone.

Written by David Rodriguez, Quantitative Strategist and Joel Kruger, Technical Strategist for http://www.DailyFX.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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