Euro to Surpass Consensus With 6% Drop by April: Market Reversal

The euro has peaked against the dollar for now and is set to drop more than 6 percent in the first quarter alone, trading patterns suggest, as the European Central Bank’s monetary policy diverges from that of the U.S.

The euro’s failure to rally beyond $1.3812 on two occasions last month has set it up for a decline, say analysts at Citigroup Inc., the second-largest foreign-exchange trader. The 18-nation currency’s inability to breach a resistance line drawn from its 2008 high means the outlook is negative, according to Commerzbank AG, which predicts it will fall to $1.2755 within three months, from its current level of about $1.36.

“The pressure from the euro up-move is waning,” Karen Jones, Commerzbank’s London-based head of foreign-exchange technical analysis, said in a phone interview yesterday. “The long-term move that the euro has had since the middle of 2012 is likely coming to an end now.”

The ECB’s accommodative policy contrasts with the Federal Reserve’s plan to cut its monthly bond purchases, leading most dealers to predict the euro will weaken this year. Even so, technical indicators suggest a plunge almost three times the size of that predicted by strategists in a Bloomberg survey.

The euro will slide about 2 percent to $1.33 by the end of the first quarter, before depreciating to $1.28 by Dec. 31, according to the median estimate of about 50 analysts and economists compiled by Bloomberg. The shared currency gained 4.2 percent versus the dollar in 2013, its best annual performance since 2007, and touched a two-year high of $1.3893 on Dec. 27. It fell back to $1.3586 as of 12:01 p.m. New York time.

Inflation Slows

The euro area’s emergence from its longest-ever recession last year helped spur the currency, even as the ECB lowered its key interest rate by a half percentage-point to a record 0.25 percent. President Mario Draghi said the region faces a “prolonged period” of low inflation as the ECB carried out the most recent reduction in November.

There may be pressure for further cuts after an official report yesterday showed that consumer-price inflation slowed to 0.8 percent in December, retreating further from the central bank’s 2 percent ceiling.

“December’s fall in euro-zone CPI inflation will add to concerns that the region could suffer from a bout of deflation and increase the pressure on the ECB to take more action to support the economy,” Ben May, European economist at Capital Economics Ltd. in London, wrote in an e-mailed note yesterday.

Relative Strength

When the euro reached its December high, an indicator known as the weekly relative-strength index remained at about 60, according to data compiled by Bloomberg. That’s below the 70 level that may indicate an asset has climbed too rapidly and is be poised to reverse.

Commerzbank’s Jones said the fact the euro’s rally wasn’t followed by a corresponding increase in the RSI constitutes a “bearish divergence” that presages a fall. The advance faltered at a trend-line drawn from the July 2008 high of $1.6038 taken through the 2011 peak of $1.4940. That signaled its recent ascent had come to an end, she said.

The euro may still find support as it slides to the December low of $1.3524, then the 200-day moving average of about $1.3325, followed by the November low at $1.3296, according to Jones. A break below that level would open the way for a decline to the July 2013 low of $1.2755, she said. Support refers to levels where buy orders may be clustered.

The euro’s failure to sustain a move beyond the $1.38 area in December created a double-top pattern that may see it decline to around $1.3440 by the end of this month, according to Shyam Devani, a technical analyst at Citigroup. A sustained move below $1.3625 would be required for the double-top to be confirmed, he said, forecasting that the euro will tumble about 10 percent within 12 months.

“This has been a double-top in the making,” London-based Devani said in a phone interview yesterday. “We’re bearish overall on the euro from a short- and medium-term perspective.”

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