Euro: Upside limited above fair value against US Dollar – Scotiabank

Scotiabank strategists Shaun Osborne and Eric Theoret report EUR/USD consolidating in the mid to upper 1.16s after stronger German IFO and Gross Domestic Product (GDP) data, which should bolster European Central Bank (ECB) confidence ahead of the September 10 meeting. Markets have nearly fully priced a 25 bp hike and further tightening, but they see little room for additional near-term Euro strength as spot trades slightly above its fair value estimate.

Euro supported but near-term gains capped

"The EUR is quietly consolidating in the mid/upper-1.16s, offering no material reaction to the release of better than expected German IFO business sentiment data for August."

"Germany’s final Q2 GDP figures also delivered a minor surprise, with an improvement largely driven by trade. The releases are constructive, and should provide confidence to ECB policymakers as they head into the next rate decision on September 10th."

"The meeting is nearly fully priced for a 25bpt hike (~24bpts) and short-term rates markets currently reflect a cumulative 42bpts of tightening by year end."

"The recent recovery in yield spreads has provided fundamental support to the EUR, however we see little scope for additional near-term strength as spot currently trades with a slight premium to our narrow fair value estimate at 1.1622."

"Bullish – the RSI remains bullish around the overbought threshold at 70. The latest rally looks to have stalled above near-term resistance around 1.17, and we note the absence of any additional meaningful resistance ahead of 1.18. We see near-term support at 1.1650 and 1.1600, and note the 200 day MA at 1.1632. "

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)