Euro on track for a rebound

While it is still too early to call for a major reversal in the downtrend, we can expect a short-to medium-term rebound towards 1.15 in the coming months, writes Aksel Kibar.

There is widely held expectation that parity – €1 equalling $1 – is just around the corner. Philippe Huguen / AFP

Since the European Central Bank announced in late January its €1.1 trillion quantitative easing programme – which involves buying €60 billion of bonds each month from the market – the euro has made the news because of its rapid depreciation against the US dollar.

The widely held expectation is that parity – €1 equalling $1 – is just around the corner. However, analysing the chart for the cross-rate suggests this is not necessarily the case, and that we can expect a short-term rebound in the euro in the coming weeks.

The chart clearly shows that the euro’s recent fall is an extension of quite a dramatic, longer-term decline, which began early last year.

But the euro-dollar rate is now approaching its long-term trend line support between 1.03 and 1.05. This line can be traced from a low found in 1985 by the euro’s predecessor – the European Currency Unit, which was the European Union’s official unit of account. It then traverses the low of 0.80 levels tested in 2000, shortly after the euro was launched.

After that, the euro spent two years of consolidation and base-building before rallying to reach highs near 1.60 in 2008, when a period of volatility ensued and the currency pairing fluctuated between 1.20 and 1.50.

Parity may well be reached at some point in the coming years, but the strong support defined by the long-term trend line will need to be tested and breached for that to happen.

Given the magnitude of recent declines, we should expect the euro-dollar rate to find support between 1.03 and 1.05. While it is still too early to call for a major reversal in the downtrend, we can expect a short-to medium-term rebound towards 1.15 in the coming months.

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

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