Long or short EUR USD

Short EUR/USD

The European Central Bank has turned even more dovish by expanding its asset purchases programme aggressively in March. Meanwhile, the US Federal Reserve is still the only major central bank looking to increase interest rates this year. While the recent dollar selling in response to the Fed turning less hawkish makes sense, it may be overdone a little. US economic data could easily turn positive as a result of the recent depreciation of the dollar, while inflation could overshoot expectations if oil prices continue their sharp recovery from Q1. These potential scenarios could force the Fed to pursue a more aggressive tightening cycle, which could see the US dollar regain its composure, especially against currencies where the central bank is uber-dovish, such as the euro. Against this fundamental back drop, the potential gains for the EUR/USD exchange rate look limited. If confirmed by a technical reversal pattern, say around the 1.15 area or higher, the EUR/USD could easily drop back towards its 200-day moving average around 1.10, or lower.

Long EUR/USD

Before the start of the year, the Federal Reserve had hinted at four US interest rate hikes in 2016. However, the incoming data in the first quarter of this year has been mixed at best and as a result the Fed has been quick to change its tone regarding the pace of future interest rate increases. Indeed, according to the CME Group’s FedWatch tool, the probability of even one rate rise in 2016 is now lower than 50 per cent. Meanwhile, the euro has started to climb despite the European Central Bank turning more dovish. In March, the euro shot higher after an initial wobble despite the fact the ECB expanded its QE stimulus package. This type of market reaction strongly suggests that the EUR/USD exchange rate may have bottomed out; otherwise, the EUR/USD “should” be a lot lower. As such, a break above the key 1.1500 resistance level looks imminent, which could pave the way for a rally towards the next psychological level of 1.2000.

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