(Bloomberg) — The longest euro rally in almost a decade is at risk of petering out even as investors’ appetite for risk makes a comeback.
Europe’s shared-currency climbed for a ninth day Thursday — the longest streak since 2011 — after the European Central Bank expanded its emergency bond-buying program to counter the economic impact of the coronavirus pandemic. It reached an almost three-month high of $1.1362, more than 4.5% above its May 25 low.
Yet while the euro’s surge against the dollar and other peers took it past key resistance levels, some strategists are urging caution and technical gauges are flashing warning signs.
“The ECB-induced euro rally is running out of steam,” Petr Krpata, a strategist at ING Bank said by email. Any “meaningful” euro gains should stem more from the dollar’s bear trend, rather than additional ECB impact, he said.
The euro currently appears to be overbought against the greenback, based on a relative strength index — an indicator that measures the speed and size of price movements. A stochastic gauge, meanwhile, suggests that upward momentum may dwindle in coming sessions as the pair nears its year-to-date high of $1.1495.
Citigroup’s global head of foreign-exchange analysis Ebrahim Rahbari reckons now is a good time to take some profits even though he remains bullish on the currency. And ABN Amro’s Georgette Boele says it is premature to expect a “continued strong rally” in the currency as “difficult discussions” are ahead on the European Commission’s stimulus program.
The euro largely traded in lockstep with surging equity markets amid optimism about the prospects for a global economic recovery. Some are concerned that the recent surge in appetite for riskier assets may have gone too far, though, and that could also weigh on the common currency.
There are echoes in the current move of the euro’s rebound in late March, when it recovered from its pandemic lows. Back then, a rally of around 5% in just over a week was followed by a 3.5% slide in a matter of days.
Many observers nevertheless remain solid in their bullish calls for the euro. A trio of Societe Generale (OTC:) SA’s quantitative models are signaling that the euro is the top Group-of-10 currency that investors should wager on to rally.
Nomura’s Jordan Rochester has a “high conviction” on the euro-dollar pair after last week flipping to a long position from a short one. And Standard Chartered’s Steven Englander says the euro region is looking more attractive.
The currency busted through several key technical resistance levels against its Japanese peer on Thursday. The euro rose as much as 1.3% to 123.92 yen, the highest since May 2019 and notched its longest such streak of daily advances in over a decade.
The technical significance of the move was further bolstered by the fact that the pair has breached its 55-week and 100-week moving averages.
But, as with the euro-dollar pair, further gains may be difficult to muster. The euro-yen cross has struggled in the past to breach its 200-week moving average — currently 124.50 — and RSI gauges are also signaling that it’s getting stretched.
That, combined with concern about waning fundamental factors, could well provide fodder for euro bears.
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