Prediction of a sharp move higher in EUR/USD, after the currency pair ended three months of range trading in February

In the last week of the month, the currency pair surpassed all-time highs of 1.497, having traded between 1.431 and 1.497 since December. This provided a strong signal that the market would try to move the pair to at least 1.55 or 1.56, said Mariusz Potaczala, chief executive at the broker in Warsaw.

Potaczala said that, despite the Fed's aggressive rate cuts, it was apparent US stocks were still under pressure, with the Dow Jones index closing 500 points down at 12,250 at the end of February. "It was clear that confidence in the US economy and USD was badly affected," he added.

The Polish broker's one-month forecast, submitted on February 29, had EUR/USD trading at 1.55. This compared with a rate of 1.5815 reached on Monday, March 31. Similarly, it had predicted USD/JPY and USD/CHF would trade at 102 and 0.99, respectively, against actual rates of 99.36 and 0.9926 last Monday.

Potaczala said technical targets for ranging patterns called for a sharp move higher. "We had stayed in the range for too long just to see a small move, which is why our EUR/USD target was so ambitious."

However, failure to anticipate the looming US subprime mortgage crisis resulted in the company finishing last in the 12-month forecast table, said Potaczala. In March last year, TMS expected the US to outperform European economies, and that US interest rates would be stable or even higher. The company put EUR/USD at 1.24 and, from a technical view, did not expect the December 2004 high of 1.37 to be exceeded.

Indeed, with the currency pair trading at 1.33 at the time, 16 of the 39 forecast contributors picked a sub-1.30 rate.

Potaczala said that, if EUR/USD remains at current levels until this week's G-7 meeting, there is increased risk of a co-ordinated intervention by central banks. However, if the rate is around 1.52-1.53, such action would not be deemed necessary and "verbal action should be enough to strengthen USD".

Over the next three to six months TMS expects EUR/USD to return to 1.47, with negative news already priced into the dollar. Bad news from the European financial sector has yet to be priced in.