This Euro Rally Could Keep Going for a While
The euro hit a 14-month high against the dollar on Wednesday, and according to a number of analysts, the recent rally is set to continue as improved sentiment for the euro bloc takes hold.
Geoffrey Yu, foreign exchange strategist at UBS told CNBC that the euro will retain its strength over the next month as investors wait to see if the European Central Bank (ECB) will activate its bond buying program, called the OMT, or outright monetary transactions.
"Our month-long forecast is for $1.37, more real money from asset managers being squeezed into euro zone. We might run into a wall if we get a difficult auction, but the real opportunity will be when the OMT is activated by any country, things falling into place. Then you sell into that spike and that will be the real opportunity," Yu said.
The euro crossed $1.35 on Wednesday, hitting a session high of $1.3557 – as improved sentiment in the euro zone and disappointing U.S. fourth-quarter gross domestic product (GDP) data boost the currency.
Ashraf Laidi, chief global strategist at City Index, said the euro could rise even higher, suggesting it could hit $1.40 by the end of this quarter.
"We're going up because of [Mario] Draghi's desire to inject liquidity and his statement stabilized sentiment. It is also higher because central banks have been injecting liquidity and this all helps risk appetite.It's a result of improved expectation and stabilization in the euro zone."
He added that the euro was now a sentiment trade but the economic troubles in the euro zone had not disappeared but stability had returned in the core.
Earlier on Wednesday, Lloyds predicted the currency would break through the $1.35 barrier.
(Read More: How to Play a Rising Euro)
"Only if we see a change to a risk negative mood should there be any risk of EUR/USD reversing lower. Even then, the reversal may well not come, given that the rise in EUR yields has been based on a reduction of tail risks," Lloyds said in a research note.
But Derek Halpenny, European head of global markets research,warned that a strong euro could derail the fragile economic stability within the euro zone.
"The euro-zone may have restored stability in periphery debt markets but a strengthening currency and rising short-term interest rates is not what the economy needs and this move above the 1.3500 level versus the dollar will prove temporary," Halpenny said, pointing to another contraction in Spain's GDP.
(Read More: Investors Throw Spain a Lifeline as Economy Shrinks)
Data from the Commodity Futures Trading Commission show that traders increased bets last week that the euro would rise against the dollar. Net long positions on the euro were the highest since July 2011.
"Politically and from the ECB level things are being kept forward moving towards ever closer union. That reduces a lot of tail-risk." Yu of UBS said. "That has been the fundamental change in perception over the euro zone, that's the first step. Now people are talking about deficit reduction and whether austerity is working. We'll have to see."
—By CNBC's Shai Ahmed; Follow her on Twitter @shaicnbc