As the US and Eurozone approach the tail end of their interest rate cycles, the ongoing conflict in the Middle East is instigating a cautious approach towards risk. This situation might trigger intervention to cap the Swiss franc, potentially stabilizing the euro exchange rate at its current familiar levels.
Euro to Dolar Rate Year-Long Range
Throughout the year, EUR/USD has rarely strayed beyond the range of 1.05 to 1.0. Besides, any excursions beyond these limits have been promptly reversed.
Possible intervention by the Swiss National Bank (SNB) to suppress the franc’s surge, driven by the Middle East conflict, could play a vital role. The rebalancing of reserves, where 75% of francs are held in dollars and euros, might act as a stabilizing force. Therefore, it might further dampen the volatility that has spiked in recent weeks.
Impact of Conflict on Interest Rates
The conflict should reduce the likelihood of further interest rate hikes in both the US and the Eurozone. This maintains a slight advantage for the dollar. Therefore, traders observing the decline of EUR/USD from 1.1276 to 1.0448 since July mind find it helpful to exercise caution in selling at this lower range.
War tends to disrupt carry trades. At these diminished levels, the peril of adverse currency movements arguably outweighs potential interest rate returns.
Long Positions Euro Forecast
The number of long positions in the euro rate has dropped considerably, down by two-thirds. The pair has transitioned from an overbought situation that constrained it in July to an oversold scenario.
EUR/USD exhibited slight positive momentum on Monday, bolstered by subdued USD activity. However, expectations of at least one more Fed rate hike in 2023 could serve as a restraint, potentially capping the pair’s upward movement.
ECB’s Reluctance in Rate Hikes
Anticipation that the European Central Bank (ECB) is concluding its rate-hiking phase might discourage bulls from making aggressive bets on the euro buy back rate.
The EUR/USD initiated the week on a positive note, countering some of Friday’s losses but stabilizing just below the psychological 1.0500 mark. While spot prices have temporarily halted a two-day decline, caution is advised before positioning for further appreciation.
Factors Influencing USD Dynamics
The USD’s capacity to capitalize on post-US CPI gains has some limits. It oscillated within a range during the Asian session on Monday. This, however, provided some support to buy the euro due to prevailing expectations of prolonged higher interest rates by the Federal Reserve.
The outlook remains favourable for elevated US Treasury bond yields, bolstering the dollar. Nonetheless, dovish remarks by several Fed officials suggest a potential pause in interest rate adjustments, potentially marking the end of the tightening cycle.
ECB’s Final Hike and Cautionary Notes
The ECB’s signal in September that their tenth consecutive rate hike would likely be the last, coupled with cautious optimism about inflation, sets a tone of prudence. ECB President Christine Lagarde’s remarks about potential risks to global growth further underline the need for caution.
As of Monday, no significant euro exchange rate data from the Eurozone is on schedule. Focus shifts to the US economic docket featuring the release of the Empire State Manufacturing Index. However, any subsequent upward move may come off as a selling opportunity with the risk of fading quickly.