Cheaper oil which favours importers like the euro zone while undermining economies of exporters such as the United States may grease the wheels of a future EUR/USD rally.

Traders have long been inclined to buy euros – betting on a rise for the vast majority of the past two years – have been frustrated by the pair’s inability to sustain a break out from recent ranges – largely 1.05-1.10.

A drop in the price of oil, which would could lead to a longer and deeper easing cycle in the U.S., could be the missing element for a sustained EUR/USD rise, though much is yet to be decided.

Supply seems to favour a drop, with crude softening despite conflict in the Middle East. Charts suggest a drop with significantly lower highs from $92/bbl in April to $87.50 in June and $82 this month. Brent Crude has sustained a break below the influential 200-WMA, which, having helped to shape lows for a long time, played a role determining this month’s high.

The expected slowing in the U.S. economy, which is fuelling expectations for a 2% drop in the nation’s interest rate within the next 12 months, is set to dampen demand.

A break from $70-100/bbl bounds is needed for oil to truly excite and while the United States refills the strategic petroleum reserves, that may be unlikely.

All that said, oil is softening ahead a U.S. easing cycle that will strengthen an already strong resolve to bet on EUR/USD rising which could see last year’s high at 1.1276 revisited. Should it break EUR/USD could reach 1.1750.
Source: Reuters (Jeremy Boulton is a Reuters market analyst. The views expressed are his own; Editing by Alison Williams)