FxWirePro: Larger correction likely for euro before buying resumes

Since Friday, the single currency has declined around 120 pips or 1 percent against the dollar and we expect the correction to continue further before buying resumes. Since the French election, the euro has strengthened more than 1000 pips or around 10 percent riding on diminishing political risk premium and a change in tone in the forward guidance of the European Central Bank (ECB).

While the clean break of 1.16 area (the top resistance of the congestion area) clearly indicates that there has been a change in the trend, we believe that the euro has moved faster than the current ECB policy calls for. The deposit rate is still maintained at -40 basis points by the ECB, while its purchases assets at €60 billion per month, which is forecasted to continue at least until the end of this year. ECB communications suggest that the central bank is very much unlikely to bring the purchase to a halt but rather reduce the pace beginning next year. In addition to that, there are still some political risks looms over the region with the German and Italian election due by early next year.

The euro is currently trading at 1.174 against the dollar and we expect it to drift towards 1.16 or beyond before significant buying resumes. The next month’s German election could turn out as a positive catalyst for the euro, where Angela Merkel is expected to win and become Germany’s longest serving chancellor.