EURUSD: is 1.3960 on the cards?

We are starting to see some divergence in the G10 FX space, while last week it was all dollar negative, this week things are more nuanced and the dollar is gaining against the commodity bloc currencies, although it continues to lose ground versus the SEK, JPY, CHF, EUR, NOK, GBP.

Although the EUR is giving back some gains today we believe that any dips may be shallow because: 1, the EUR may benefit from improved data, the recent downturn is perfectly normal after consecutive months of growth, and is not worrying to us just yet. 2, The relative size of the ECB/ Fed balance sheet remains in the EUR’s favour. 3, Added to this, there was a glimmer of hope on the consumer lending front for the Eurozone with private sector loans contracting by 1.9% annually last month, down from -2% in August.

We believe that any dips in EURUSD could be faded by the market. Key short term support levels include: 1.3775 and then 1.3755 – the 100-hour moving average. On the upside, key resistance lies at 1.3830 – the high from earlier today, then 1.3900 – a psychologically important level. Above here opens the way to 1.3960 – the top of the monthly Ichimoku cloud.

As a caveat, although the ECB has been fairly sanguine about EURUSD strength above the prior 2013 highs at 1.3710, the closer we get to 1.40 the larger the risk of some verbal intervention from the ECB to limit the single currency’s strength.