Euro's Big Month Has Chart-Watchers Looking Back to 2010 Levels

(Bloomberg) -- After the euro surged through a critical technical level last week, analysts who study charts to help guide their predictions are looking back to 2010 for perspective on how high it could rise.

Europe's common currency traded at about $1.1830 Wednesday, extending an advance after breaching the key $1.1714 mark July 26 for the first time since August 2015. The euro is coming off a five-month rally, its longest since 2013, propelled by interest-rate differentials that have gone in its favor and broad dollar weakness.

The 19-nation currency still has room to run, according to analysts at Canadian Imperial Bank of Commerce and JPMorgan Chase & Co. They point toward $1.1877 and $1.2043, the euro's lowest levels of 2010 and 2012, respectively, as technical levels that loom as near-term targets. The euro reached $1.1868 Wednesday, its strongest since January 2015. The options market shows that traders are gearing up for more strength, with demand growing for calls, which give the right to buy.

"The domestic fundamentals in the euro zone are robust, and the market is gradually repricing that into the currency," said Bipan Rai, a strategist at CIBC.

Looking beyond the lows of 2010 and 2012, Niall O'Connor, a technical analyst at JPMorgan, pointed toward $1.2167 as another level to monitor. That figure marks the 50 percent retracement of the decline from the euro's 2014 high just shy of $1.40, he said.

Further euro upside could be a grind, however, amid technical signals that the currency is "as overbought as you can get," O'Connor said.

The euro surged 3.6 percent versus the dollar last month, the most since March 2016, and is up almost 11 percent since the start of April.

Read here for more indicators suggesting the euro's rally may slow.

And there's another risk, which is that the European Central Bank may tire of the appreciation, which reduces inflationary pressure in the euro region.

That said, euro bulls are full of confidence. Risk-reversals, a measure of demand for euro calls relative to puts, are around an eight-year high for three-month tenors, a period that includes the next Federal Reserve and ECB meetings. And euro net longs are hovering around the highest since 2011 among hedge funds and other large speculators, Commodity Futures Trading Commission data show.

Credit Suisse and Credit Agricole are among banks that have raised euro forecasts in recent weeks. Credit Suisse upped its 12-month call to $1.22 from $1.15, while Societe Generale said that a jump to $1.20 is possible in coming months.

--With assistance from Robert Fullem

To contact the reporter on this story: Alexandria Arnold in Seattle at abaca3@bloomberg.net.

To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Mark Tannenbaum, Vivien Lou Chen