EUR/USD: The US dollar is well placed to strengthen further in the near-term – MUFG

Analysts at MUFG Bank point out the EUR/USD pair is testing a critical support a 1.1000. They see low volatility in the forex market and higher yields on offer, encouraging for a stronger US dollar. 

Key Quotes

“The USD is attempting to extend its advance in the near-term after bottoming at the start of November. EUR/USD is currently testing support at the 1.1000-level for the second time this month."

“One-week implied EUR/USD volatility has fallen to a new record low. Our carry attractiveness index is clearly signalling downside risks for EUR/USD in the near-term signalling a more sustained break back below the 1.1000-level. At the same time, the USD is deriving support from the scaling back of concerns over the health of the US economy. A batch of better than expected data this week has the potential to extend into next week. It’s a key week of course with the ISM manufacturing data at the start of the week and Nonfarm payrolls on Friday. Manufacturing sentiment readings have begun to turn a little higher and that’s likely in the US as well. Our US rates analyst is predicting an NFP gain of between 180k-200k, which we think will only underline the current appetite for carry that favours the US dollar.”

“We expect current low FX volatility conditions to continue in the week ahead. It provides a favourable backdrop for higher yielding currencies such as the USD. Progress towards a USChina trade deal and record highs for the US equity market are easing downside risks for the US economy. 

“EUR/USD breaking below 1.1000 would be important bullish technical signal for the USD. The SPD leadership election result this weekend could trigger euro selling as well. The main downside risk to our bullish USD view would be surprise weakness in the latest ISM surveys and NFP report.”