Foreign exchange analysts at MUFG suggest the risks for the Euro (EUR) against the US Dollar (USD) are skewed to the downside in the coming week.
Ahead of the key ECB and FED policy updates, the Euro to Dollar exchange rate is trading 0.33% lower, at 1.10882.
The Euro to Pound exchange rate is also on the back foot, with EURGBP trading at 0.8638, a 0.2% drop on the opening levels for the day.
Analysts at MUFG noted a modest decrease in the Euro against the US Dollar over the past week.
"The EUR has corrected modestly lower against the USD over the past week. After hitting an intra-day high of 1.1276 on 18th July, EUR/USD has fallen back towards the 1.1100-level," says Derek Halpenny, Head of Research Global Markets at MUFG.
The analyst attributes this slight pullback to a broad-based rebound for the USD following last week’s hefty sell-off triggered by weaker US inflation reports.
Halpenny expounds, "It has been driven mainly by a broad-based rebound for the USD following last week’s heavy sell-off triggered by weaker US inflation reports."
This situation led to a fresh year to date low of 99.578 on the dollar index on 14th July, he adds.
In contrast, the Euro has been in a consolidation phase at higher levels against MUFG's equally-weighted basket of other G10 currencies in recent months.
This consolidation followed a period of notable Euro outperformance between February and April.
"In contrast, the EUR has been consolidating at higher levels against our equally-weighted basket of other G10 currencies in recent months," Halpenny says.
Despite recent price action, MUFG's strategist is convinced that EUR/USD has transitioned into a new higher trading range between 1.1000 and 1.1500.
This shift is significant as it breaks away from the primary trading range of 1.0500 and 1.1000 that was dominant during the first half of the year.
"In light of recent price action, we are confident now that EUR/USD has moved into a new higher trading between 1.1000 and 1.1500," says Halpenny.
Under these conditions, Halpenny asserts that the likelihood of EUR/USD risk is skewed to the downside in the upcoming week, influenced by policy updates from the ECB and the Federal Reserve.
He believes this scenario is probable if the Fed does not indicate that the impending rate hike is the final one in the cycle, and if the ECB does not firmly commit to another hike later this year. However, he is confident that the 1.1000 level should provide a solid support.
"On balance, we believe that risks for the pair are skewed to the downside in the week ahead from the ECB and Fed’s policy updates," he explains, adding, "However, support at 1.1000 should hold and provide an opportunity to build long positioning in anticipation of a move towards the top of the range in the coming months."
Foreign exchange strategists at Goldman Sachs, are of the view that the Euro has come a long way in a positive sense from the lows it experienced the previous year.
"Helped by lower energy prices and resurgent inflation, on a broad basis the currency is the strongest it has been since the ECB cut rates into negative territory almost a decade ago", says Kamakshya Trivedi, the Head of Global FX, Rates and EM strategy at Goldman Sachs.
This, according to Trivedi, seems somewhat paradoxical given the economic slump that was witnessed in the first half of the year.
The resilience of the currency is, in a large part, due to the hawkish stance of the ECB, which Trivedi attributes to their reputation.
"We think the ECB’s hawkish stance—and reputation—is largely responsible for the currency’s recent resilience," he states.
However, Goldman Sachs' strategist expects this resilience to moderate over the ensuing months. Trivedi notes that, in recent months, the markets have factored in a more 'hawkish' reaction function from the ECB.
"Essentially, forward rates have been mostly impervious to weak activity and slowing inflation," he adds.
Trivedi points out that this was visible in the US CPI report, with Euro area fixed income showing little rally, causing the rate differential to shift notably in favour of the Euro. He further comments on the potential change in this dynamic:
"We expect that to become more balanced in the weeks ahead, on both sides of the equation." Goldman Sachs rates strategists believe that the US front end moved too aggressively to price lower real rates a few years forward, and there is an anticipation that ECB commentary could start to moderate as well.
The strategist draws a comparison between the ECB's strategy and the Fed's on a 2-meeting 'tape delay'.
"For a while now, the ECB has sounded a lot like the Fed on a 2-meeting ‘tape delay’," says Trivedi.
The economists at Goldman Sachs project no real commitment to further rate hikes in the upcoming meeting.
"Our economists expect something similar for the July meeting, with no explicit commitment to further rate hikes—very unlike the ECB’s message in June, and closer to the May and June FOMC," he adds.
Despite the recent serious breach, Trivedi maintains a conservative outlook for the EUR/USD, keeping the year-end forecast at 1.10.
"We still maintain our year-end EUR/USD forecast of 1.10. While the recent breach has been the most serious yet, we think the next few weeks should show that the Euro area is not far behind on the policy path," says Trivedi.