Idea of the day euro finds its wings

What: the euro has been under pressure in recent days, but after EUR/USD fell to a low of 1.1110 overnight it is now in recovery mode. A combination of a wobbly pound ahead of the UK election and rumours that the ECB staff forecasts will be upgraded next week and the ECB statement will be less dovish, have given the green light to the euro bulls. 

How: we think that a break of resistance at 1.1268 – the high from 23^rd May could be on the cards, and we may see the euro rally into next week’s ECB meeting. The uptrend continues to look strong and the fact that the recent pullback did not see EUR/USD fall below 1.1080 – the low from 18^th May - suggests that momentum remains to the upside. A break above 1.1268 could open the way to 1.15 in the coming weeks, especially if we get a less dovish ECB. Above here then 1.1736 – the 38.2% retracement of the 2014 – 2017 downtrend – comes into view.  

Risks: As with any currency pair there are risks to this view. The key political risk is Italy. It could be the canary in the coalmine for the euro. Beppe Grillo, the anti-establishment and anti-euro leader of the Five Star Movement, continues to poll well. While we don’t expect the Italian authorities to call an election until next year, any sign that the Five Star Movement could win a future election is likely to weigh on the euro.

Added to that, the euro has been doing well on the back of better economic data in the currency bloc. While we expect this to continue, any sign that the economy is fading could also weigh on the single currency.

This idea is designed to also benefit from a less dovish ECB next week, but if this fails to be the case then we could see euro weakness, with 1.10 as key support for EUR/USD.