The CurrencyShares Euro Currency Trust (NYSEArca: FXE) is up 4.2% over the past month and there could be more upside to come for the euro exchange traded fund as some market observers are forecasting a move higher for the common currency.
The U.S. dollar has previously been strengthening on the prospect of a tighter monetary policy, which would help remove some of the excess liquidity sloshing around in the economy. However, without the Fed’s support, the greenback looks less attractive.
Additionally, the weaker-than-expected economic data that revealed the U.S. services sector expanded at a slower pace month-over-month also weighed on expectations the Fed would hike rates again soon, which further pressured the USD.
“Amundi SA and Axa Investment Managers say the dollar’s strength will constrain the Federal Reserve’s ability to boost borrowing costs aggressively next year, after it raised rates this week for the first time in almost a decade. Strategists surveyed by Bloomberg forecast gains in the U.S. currency will slow to 3.4 percent against the euro in 2016,” according to Bloomberg.
With bets dwindling that the Federal Reserve will raise interest rates this year, the dollar’s upside could be muted while currency investors flock to the euro.
“The latest rally looks to have morphed into a Euro Currency breakout that may have legs. If so, it would provide commodities some long awaited relief from King Dollar. Take Gold for example – it’s been on fire in 2016 and looks to be enjoying the tailwind of a stalling/weaker US Dollar. As well, Crude oil, copper, and select grains are off their lows. Perhaps a weaker buck would help them out too,” according to See It Market.
What could stand in the way of an extended rally for FXE is the European Central Bank possibly adding to its quantitative easing efforts. The ECB disappointed markets in December by announcing smaller-than-expected additions to its QE program, prompting speculation that the central bank could make a more dramatic announcement sometime this year.
“If this Euro currency breakout sees upside follow through that leads to a meaningful rally, it would add pressure to the US Dollar and help US corporations with exports and overseas sales. But that part of the equation may take a some time to bear fruit,” adds See It Market.
CurrencyShares Euro Currency Trust
