EURUSD Parity Dream: Will ECB start raising rates?

Mar 31 2017, 4:42 pm
Euro Dollar_Technical outlook

For the past two years, when things in Europe started to get complicated, especially when growth stagnate and inflation slowed down significantly, everyone turned bearish on the Euro, and they were right about it.

The Euro lost more than 25% since May of 2014 until it bottomed around 1.03 at the beginning of this year. However, it is close to the parity level, but it did not print it as of yet.

Moreover, many of the global banks forecasted that the Euro would decline even below the parity level. Some of them also expected the Euro to decline below 0.99 toward 0.85 and even below that.

However and so far, we haven’t seen the parity level nor below that level as well. Instead, the Euro has been gaining momentum since the beginning of the year, and now the expectations have flipped a little bit.

Some of the global banks decided to raise their forecast above the parity level, and some of them even got stopped out on their aggressive short positions.

So, will the Euro decline to that parity level what everyone is talking for more than two years, or even below that?

The simple answer to this question is, there is only a slight chance that we could see such decline, but not after the ECB decided to start tapering its current QE in April of this year. Moreover, inflation is on the rise across Europe, which may force the European central bank to raise rates before the end of the current QE.

Why Could The Parity Level Be A Dream?

Fundamentally, there are many signs of a bottom in the Euro, beginning with tapering the current QE starting from April until the end of the year.

Moreover, rising inflation and better than expected economic activities may really force the ECB to start raising rates sooner than later, which in return should push the Euro higher.

Some would say, the Federal Reserve might be faster in raising rates. This is actually true. But if you look at the chart, since the Federal Reserve raised the rates twice, the Euro kept on trading within a wide range, without breaking key levels.

In addition, the effect of raising rates on the US economy is yet to be seen in the next few months, which might lead the fed to back off for some time.

What’s Next Then?

From a technical point of view, the Euro has been trading above this year’s low with no clear break below that level or even a notable pressure to the downside.

Many candles on the monthly and the weekly close suggests that there is a buying interest on each dip. A formation of higher lows is also can be seen on the monthly chart. Therefore, this would be one of the good signs to start building a long term position.

For the time being, I would be conservative with buying the Euro. However, since the dips are limited since the beginning of the year, I would suspect that the recent dip for the past few days would also be another limited dip before the trend resumes.

To be safe, I would stay bullish on the Euro in the next few weeks and months as long as it stays above this year’s low which stands at 1.0340.

On the upside view, there is still a possibility to revisit the recent highs above 1.09 resistance area. A break above that resistance would clear the way for further gains, probably above 1.10.

Nour Eldeen Al-Hammoury

Nour Eldeen Al-Hammoury has more than ten years of experience in focusing on foreign exchange and global economic developments, as well as central bank policies and intermarket analysis (global markets relationships). Nour Eldeen is a regular on many major TV networks (several times each) such as: BBC Radio, BBC World News, Al-Jazeera, Al-Hurra TV CNBC Europe, CNBC Asia, CNBC Arabia, Al Arabiya, Bloomberg, Russia Today, Dubai TV, Sama Dubai, Skynews Arabia, Qatar TV and Future TV News.