Euro up on fundamentally attractive valuations

In our October 26 report, we had forecast a downtrend in the EUR/USD pair.

Further, we had also mentioned our plan to go short in the currency pair near 1.1820, with a target level of 1.1560. Our desire to invest in a put option was also revealed in the report.

As forecast, the EUR/USD pair declined and hit our target level. In the past two trading sessions the EUR/USD pair has recovered to 1.1610 levels. For the reasons mentioned below, we anticipate the uptrend to continue in the week ahead.

According to Valentin Marinov, a strategist at Credit Agricole, the Euro is still trading at a fundamentally lower value against the US dollar. The argument is based primarily on the estimate of fair value for the EUR/USD pair. In support of the argument, Marinov also stated that the downside risk has considerably reduced after the ECB revealed its tapering plan, which will result in a reduced purchase of €30 billion worth debt instruments from January 2018 onwards, instead of the current €60 billion. The slow, but steady exit of monetary stimulus is also considered as a supporting factor for the Euro.

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Now, the only driver behind the EUR/USD rate is the economic data. With the Euro zone showing steady improvement, Marinov believes the inflation would begin to rise and that would invariably support riskier assets as well. Further, trade data reveal that a lesser number of carry traders are borrowing large volumes of Euros to sell in the market as the sentiment has turned bullish towards the Euro. That would make the assets denominated in the Euro more attractive to the overseas investors. As far as the Greenback is concerned, the rally on the basis of an expectation of a tax reform and a highly probable Fed rate hike in December has already completed. Unless the market receives some more hints about tax reforms, or its outcomes, and future rate hikes in 2018, the US dollar is unlikely to forge higher. Thus, fundamentals support a rally in the EUR/USD pair at this point in time.

The currency pair is in an extremely oversold situation as indicated by the sub-20 reading of the RSI of moving average indicator. Further, the EUR/USD pair has found support at 1.1605. Thus, we expect a short-term rally in the currency pair.

A long position may be established by us, to profit from the uptrend. We are planning to enter when the pair trades near 1.1600. To limit risk, a stop loss order will be placed below 1.1520. We will book our profit, when the pair rises to a level of 1.1750.

Similarly, a call option may be acquired from a binary broker to gain from the rally. A date around November 10th will be chosen for the option’s expiry. We will enter into the discussed trade only when the pair trades near 1.1600 in the spot Forex market.