EUR/USD: A sharp drop to 1.1200 is possible in Q3 – Danske Bank

EUR/USD: A sharp drop to 1.1200 is possible in Q3 – Danske Bank
  • The EUR/USD pair had its best month in years in July this year.
  • The pair closed at 1.1775 on Friday after climbing to 1.1902 in July.
  • Analysts at ATFX and Danske Bank believe that the pair will give up some of its gains in the third quarter.

The EUR/USD pair climbed by more than 4.7% in July, making it its best month in more than a decade. The pair ended the week at 1.1776, which was slightly below the monthly high of 1.1902. Still, analysts at Danske Bank believe that the pair will fall back to 1.1200 in the next six months.

EUR/USD ended lower on Friday

Positive news from Europe push the euro higher

The EUR/USD pair spiked for two primary reasons. First, the positive news from Europe had an important role to play. In July, economic data from the Eurozone showed that the bloc is indeed recovering.

For example, the manufacturing and services PMI numbers rose to above 50 in June and July. That sent a signal that more businesses are reopening. Also, data showed that retail sales and inflation were peaking up. Most importantly, the coronavirus curve in the bloc continued to flatten.

At the same time, the EU recovery funddeal that was passed in July also boosted sentiment among investors. The deal will see the European Commission raise more than €750 billion in the market and distribute it to countries in form of loans and grants.

Second, the EUR/USD pair spiked because of the overall weaker US dollar. The US dollar index, which measures its performance against a basket of currencies, fell by almost 5% in July. That was mostly because of the lower real yields in the US and the rising number of covid-19 cases in the country. Also, the relatively dovish Federal Reserveand the bickering on stimulus played a role.

Analysts question whether the EUR/USD rally will continue

Now, analysts are questioning whether the EUR/USD pair rally will continue in the next part of the year. In their quarterly report, analysts at ATFX said that the rally is likely to fade in the third quarter. They expect that the pair will slide back to 1.0990.

Analysts at Danske, who had previously predicted the rally to 1.1500, now believe that there is a possibility that the pair will slide back to 1.1200. They wrote:

“Even if our base case is that EUR/USD will eventually fall back – we target 1.12 in 6-12M as we, over the medium term, still see issues with European productivity, the EU political set-up and a turn in the Chinese credit cycle – we again stress that risks are highly asymmetric (i.e. to the upside).”

However, an analyst at Goldman Sachs told Bloomberg that he believes that the euro has further to go. In an interview, Kamakshya Trivedi said that the currency will strengthen after several years of dollar strength.

EUR/USD technical analysis

EUR/USD technical forecast

The daily chart shows that the EUR/USD pair has been in a strong upward trend. It also shows that the currency closed a bit lower on Friday on profit taking. The price remains above the 50-day and 100-day exponential moving averages while the RSI has turned lower. Therefore, although the trend remains bullish, it is possible that the pair will form a pullback as bears attempt to test the important support at 1.1500.

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