Euro seen snapping advance on Fed tapering bets

The euro’s rally (FOREX:EURUSD) to a six-month high after the trading bloc emerged from its longest-ever recession is set to reverse, trading patterns show, as the impact of the stronger economy is overwhelmed by the U.S. paring stimulus.

A measure known as the euro’s moving average convergence-divergence gauge fell below its signal line last week, with momentum turning negative after the currency climbed to $1.3452 on Aug. 20, data compiled by Bloomberg show. The euro surpassed the upper limit of its 20-day Bollinger band gauge, which also signals a turnaround.

While the euro area’s economy grew 0.3% from April to June, ending six straight quarters of contraction, economists surveyed by Bloomberg still see gross domestic product shrinking 0.6% this year, compared with a 1.6% expansion in the U.S. The European Central Bank’s plan to keep borrowing costs low while the Federal Reserve prepares to reduce stimulus will also weigh on the euro.

“There’s a gap in monetary policy between the U.S. and Europe,” Kengo Suzuki, the chief currency strategist in Tokyo at Mizuho Securities Co., a unit of Japan’s third-biggest bank, said in an Aug. 23 phone interview. “Despite some positive signs in economic data of late, it’s too early to discuss the reduction of monetary easing, and that will cap the euro’s upside.”

‘Topping Out’

The euro rose almost 5% against the dollar in the seven weeks from July 9 to the end of last week and was at $1.3383 as of 9:49 a.m. in New York, little changed from its close on Aug. 23. Mizuho’s Suzuki sees it dropping toward $1.30 in the next two months, while the median forecast of more than 60 analysts surveyed by Bloomberg has the currency tumbling to $1.27 by year-end.

The euro “is already topping out” and a decline below $1.3307 will add evidence to this, Axel Rudolph, a London-based technical analyst at Commerzbank AG, wrote in an Aug. 23 report. The currency may reach about $1.28 in one to three months, Rudolph wrote.

Europe’s 17-nation shared currency has defied bears for more than a year, strengthening even as member states including Greece and Portugal struggled to pay their debts and civil unrest spread across the south of the continent.

The euro advanced 6.5% against a basket of nine major currencies including the greenback and pound this year, the most of any of its peers, Bloomberg Correlation-Weighted Indexes show.

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