Euro Seen Snapping Advance on Fed Tapering Bets: Market Reversal

The euro’s rally to a six-month high after the trading bloc emerged from its longest-ever recession is set to reverse, trading patterns show, as the impact of the stronger economy is overwhelmed by the U.S. paring stimulus.

A measure known as the euro’s moving average convergence-divergence gauge fell below its signal line last week, with momentum turning negative after the currency climbed to $1.3452 on Aug. 20, data compiled by Bloomberg show. The euro surpassed the upper limit of its 20-day Bollinger band gauge, which also signals a turnaround.

While the euro area’s economy grew 0.3 percent from April to June, ending six straight quarters of contraction, economists surveyed by Bloomberg still see gross domestic product shrinking 0.6 percent this year, compared with a 1.6 percent expansion in the U.S. The European Central Bank’s plan to keep borrowing costs low while the Federal Reserve prepares to reduce stimulus will also weigh on the euro.

“There’s a gap in monetary policy between the U.S. and Europe,” Kengo Suzuki, the chief currency strategist in Tokyo at Mizuho Securities Co., a unit of Japan’s third-biggest bank, said in an Aug. 23 phone interview. “Despite some positive signs in economic data of late, it’s too early to discuss the reduction of monetary easing, and that will cap the euro’s upside.”

‘Topping Out’

The euro rose almost 5 percent against the dollar in the seven weeks from July 9 to the end of last week and was at $1.3363 as of1:31 p.m. in New York, down 0.2 percent from its close on Aug. 23. Mizuho’s Suzuki sees it dropping toward $1.30 in the next two months, while the median forecast of more than 60 analysts surveyed by Bloomberg has the currency tumbling to $1.27 by year-end.

The euro “is already topping out” and a decline below $1.3307 will add evidence to this, Axel Rudolph, a London-based technical analyst at Commerzbank AG, wrote in an Aug. 23 report. The currency may reach about $1.28 in one to three months, Rudolph wrote.

Europe’s 17-nation shared currency has defied bears for more than a year, strengthening even as member states including Greece and Portugal struggled to pay their debts and civil unrest spread across the south of the continent.

The euro advanced 6.5 percent against a basket of nine major currencies including the greenback and pound this year, the most of any of its peers, Bloomberg Correlation-Weighted Indexes show.

Hamper Exports

A stronger currency may hamper the euro area’s exports and threaten the economy. Overseas shipments rose a seasonally adjusted 3 percent in June from May, when they dropped 2.6 percent.

ECB Governing Council Member Ewald Nowotny said that the recent “stream of good news” from the euro-region economy has removed any need to cut interest rates from a record-low 0.5 percent, while ruling out an early end to monetary tightening, according to an Aug. 22 Bloomberg Television interview from Jackson Hole, Wyoming.

Bank of Cyprus Governor Panicos Demetriades, also a member of the ECB governing council, said on Aug. 24 that policy makers can’t “rule out” lowering borrowing costs.

That contrasts with the Fed’s position, which next month may start scaling back bond purchases that have helped keep a lid on dollar strength. Minutes of the Federal Open Market Committee meeting published Aug. 21 showed that most members were “broadly comfortable” with the plan to trim stimulus in 2013.

MACD Signal

“Markets are moving ahead of central-bank forward guidance at the moment,” Chris Weston, the chief market strategist at IG Markets Ltd. in Melbourne, said in an Aug. 23 phone interview. “If we get the euro above $1.35, you’re going to start seeing a lot more verbal intervention.”

The moving average convergence-divergence, or MACD, is a gauge of momentum and is calculated by subtracting the 26-day exponential moving average from the 12-day average. The signal line is a nine-day exponential moving average of the MACD, and provides buy and sell signals.

The euro rose above the upper limit of its 20-day Bollinger band on Aug. 20 and stayed close to this indicator through the end of last week. The measure, developed by John Bollinger in the 1980s, is used by technical analysts to identify the turning point in an asset’s trajectory.

Options traders are the most bearish on the euro versus the dollar in seven weeks, according to a technical measure known as 25-delta risk reversals. The premium on three-month options granting the right to sell the shared currency compared with those allowing for purchases was at 1.49 percentage points today. It increased to 1.52 percentage points on Aug. 22, the most since July 5 and up from 0.98 percentage point on July 23, data compiled by Bloomberg show.

“The euro’s failed attempts at the $1.34 level that we’ve seen this week set the scene for a move back toward the bottom end of the recent range,” or about $1.32, Mike Jones, a Wellington-based currency strategist at Bank of New Zealand Ltd., said in an Aug. 23 phone interview.

“If we get confirmation that Fed tapering is happening in September, I suspect that will be the missing ingredient for euro weakness, and we’ll see that downtrend kick off,” said Jones, who sees the currency plunging to $1.28 by year-end.