Euro: Rally Easily Reversible, Versus US Dollar – Scotiabank

The euro's momentum against the US dollar has faded following a recent rebound, with the exchange rate trading near 1.16643 and the overall trend turning defensive. Scotiabank strategists Shaun Osborne and Eric Theoret point out that the euro's nearly 3% rally since late July is facing reversal pressure, with market sentiment turning cautious.

**Momentum Fading, Short Pressure Building**

The euro's previous gains were mainly driven by a phase of US dollar weakness, but this driver is now fading. As markets reassess the monetary policy paths of the eurozone and the US, the euro's upside momentum is clearly insufficient. According to Morgan Stanley strategists, medium-term investors are unwinding structural short positions on the US dollar, which leaves the euro vulnerable to further downside against the dollar. Should downward momentum strengthen, speculative capital may accelerate, amplifying the scale of the exchange rate correction.

**Institutions Lower Forecasts, Targets Point Lower**

Several major Wall Street banks have significantly lowered their forecasts for the euro. JPMorgan, Morgan Stanley, and BNY Mellon, among others, expect the euro to potentially fall to the 1.10 level against the dollar over the next year. Royal Bank of Canada also anticipates this target to be reached by the end of next year. While such forecasts are often adjusted with market conditions, the magnitude of this downgrade has begun to shake the previously widespread bullish consensus.

**Short-Term Risks Skew to the Downside**

The euro's current trend has turned defensive, with market focus shifting to downside support. If the exchange rate fails to regain its footing, it may test lower round-number levels later. However, market reports also indicate that the euro previously climbed to near multi-year highs, suggesting its long-term structure is not entirely broken, and the battle between bulls and bears around key levels is likely to continue.