EURUSD: Brace for a Big Drop in the Euro to Dollar Exchange Rate

EURUSDMore Downside for the Euro to Dollar Exchange Rate

The EURUSD outlook has been rising this week, returning to 1,125 after dropping to the lowest level so far this April (around 1,121) at the end of last week. There are a number of factors pointing to bullish pressure on the dollar. With the Fed ending its April meeting today (with a statement expected at 2:00 p.m.), the EUR to USD exchange rate now seems determined to climb toward 1.13.

On the other side of the Atlantic, the European Central Bank (ECB) held its usual press conference pointing to data that still shows slow growth in the eurozone, putting bearish pressure on the euro. Last week, the ECB’s press conference pushed the EURUSD outlook decisively below 1.13 to reach a new monthly minimum.

But there are two major market movers developing in the United States today. Orders of durable goods and the consumer confidence report could affect the EURUSD trend. No major shifts in the Federal Reserve’s interest rate schedule for 2016 are expected. The Fed has reiterated it will raise rates twice this year, but the conditions have not yet materialized. Still, the markets are waiting for guidance and they are ready to react to Yellen’s statement, up or down, on a massive scale.

As the U.S. Federal Open Market Committee (FOMC) wraps up its meeting today, there is an apparent consensus that the Fed will not change rates. Meanwhile, analysts suggest that the Fed is unlikely to announce a rate hike until its meeting in June—unless the data on home prices and job numbers trend upward. (Source: “Is the Fed setting the stage for a June Hike?” CBS News, April 26, 2016.)

There is an expectation that the data will not show any major change, one way or the other. In this case, the markets will push the EURUSD in favor of the euro, given the momentum of the trend over the past few days.

But all eyes are on the two-day FOMC meeting, which ultimately decides the United States’ monetary policy. The current 0.5% interest rate should stay the same and indeed, unless there is exceptional data, it is unlikely that the Fed will lift rates at the next FOMC meeting on June 14 and 15. (Source: “Little Chance (or None) Seen for Fed Rate Hike,” 247WallSt, April 26, 2016.)

Then there is the issue of oil prices. The relationship between the dollar and oil is a good predictor of market trends and it is worth considering this week.

This noted correlation between oil and the dollar is the natural result of the fact that oil, as a commodity, is quoted directly in dollars. The correlation between the U.S. dollar and oil is inverse, meaning that when the dollar goes up, oil prices go down, and vice versa.

Given that oil prices have returned to above $40.00 per barrel, there is bearish pressure on the dollar. Certainly, the bearish pressure on the dollar over the past few days reflects the higher oil prices we’ve been seeing lately. But for how long will this continue?

Overall, the dollar should still prevail over the euro in the EURUSD pairing. The euro sits at zero percent rates, possibly moving to negative territory. These will persist for a long time, given the aggressive stimulus program the ECB and Mario Draghi hope to maintain.

The dollar is simply experiencing a lull while the economy undergoes the process of normalization in U.S. monetary policy. The dollar may lose some of its steam that was pushing it toward parity with the euro for this quarter, but the bullish forecast later in the year, as the Fed applies its inevitable second rate hike, will vigorously push up the dollar in the fourth quarter.