Currency market analysis: Euro rebound on the cards

The European Central Bank’s latest moves to restart growth in the euro zone economy and stave off deflation have resulted in wild swings in global currency markets, and particularly in the euro versus US dollar exchange rate.

The euro has depreciated sharply against the dollar in recent weeks, and the chart for this currency cross-rate suggests we can expect a rebound before further weakening.

Earlier this month, the ECB reduced its benchmark interest rate to 0.05 per cent, following a rate cut in June to 0.15 per cent from 0.25 per cent, and in the process became the first major central bank to introduce negative real interest rates. Following in the quantitative easing footsteps of the US Federal Reserve and the Bank of Japan, the ECB will also seek to inject money into the economy by launching an asset purchase programme, buying debt from banks.

Even before the announcement of the measures on September 4, the euro/dollar cross rate had broken down at 1.36 levels and entered into a sharp correction. Consecutive weekly losses then pulled the euro/dollar rate to 1.29 in less than two months.

Given the magnitude of the drop and the fact that a strong support area remains between 1.28 and 1.30, we can expect stability and a rebound in the short to medium term.

But in the long term, the euro/dollar rate may well undergo a large-scale correction to its strong long-term support at 1.22.

For an indication of such a move, look for breakout below the 1.28-1.30 medium-term support in the coming weeks.

Conversely, if euro/dollar can stay above this level, it could edge up towards its strong long-term resistance at 1.36.

Support and resistance levels are technical analysis concepts whereby the price movements of securities generally stop and reverse at certain predetermined price levels. A support level is where a security’s price tends to finds support as it falls. A resistance level is the opposite of a support level. It is where the price finds resistance as it is going up.

Aksel Kibar is a technical strategist at the Abu Dhabi-based asset manager Invest AD

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