Euro-Dollar Dollar Week Ahead Forecast: Hanging in Balance as Dollar Sets Direction

- EUR/USD supported at 1.18, further down at 1.1750
- But chart resistance & USD frustrate road above 1.19
- After ECB QE shift, EZ data underwhelm for EUR/USD

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• Spot: 1.1789
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The Euro-to-Dollar exchange rate entered the new week testing a technical support level at 1.18 after its recent rebound was stifled by a cocktail of domestic and international factors that have left the single currency’s prospects hinged on market appetite for the Dollar over the coming days.

Euro-Dollar fell for four of five days last week as frequent bouts of risk aversion in global markets incited demand for the greenback and weighed on the single currency.

The Euro ebbed even as recent GDP numbers were upgraded and the European Central Bank modestly reduced the amount of government bonds it intends to buy each month under the Pandemic Emergency Purchase Programme of quantitative easing.

GDP growth was restated by Eurostat as 2.2% rather than 2% initially estimated while the ECB also raised many of its forecasts for this year and those after too

The ECB also announced lesser paces of quantitative easing for the final quarter, although neither did much for a Euro-Dollar rate that fell from levels close to 1.19 to test 1.18 on the downside by Monday.

“The overall policy stance of the ECB remains firmly on the dovish side and markets are reasonably reluctant to see this week’s move as the first step in a sustained policy normalisation path,” says Chris Turner, global head of markets and regional head of research for UK & CEE at ING.

“There are no clear data drivers in the Eurozone next week, and considering the very small fluctuations of EUR/USD around a major risk event like the ECB meeting, we could simply see the pair oscillate within its recent 1.1800/1.1900 trading range,” Turner writes in a Friday note.

Above: Euro-Dollar rate shown at hourly intervals with Fibonacci retracements of late August recovery indicating possible areas of support, and shown alongside S&P 500 futures price.

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Meanwhile, the Dollar has risen following a fortnight of declines and as investors contemplate numerous risks to the global economic outlook, though mainly government responses to coronavirus outbreaks around the world.

The extent to which these factors stoke further demand for the Dollar will determine if the Euro remains contained in the 1.18-1.19 range referenced by ING’s Turner this week, or if it instead looks for a breakout in either direction.

“Bullish price/rsi divergence and the rally back above the 50d SMA are signals that further downside might be hard to achieve. If the euro begins to rally from support at 1.18 in the next week or two then a head and shoulders bottom may form. If this forms and the neckline at 1.1909 breaks, it will target 1.2095 and 1.2205,” says Paul Ciana, chief technical strategist for currencies, commodities and bonds at BofA Global Research.

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Ciana and the BofA Global Research team have advocated selling Euro-Dollar rallies since late July and still favour the strategy for the remainder of September but have noted that any rise above 1.19 would risk encouraging further gains and lead them to become more cautious.

The Euro-Dollar rate has appeared to be stabilising since late August and analysts at Commerzbank are looking for it to bottom out above 1.1750 before making an eventual attempt to reclaim the 1.20 level.

“We still favour an eventual extension towards the 1.1990/1.2014 August 2020 high and 200-day ma” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank. “Dips lower are indicated to remain shallow and ideally will be contained by 1.1800/1.1790.”

Above: BofA Global Research graph with technical indicators and analysis.

Jones and the Commerzbank team are recent buyers of the Euro-Dollar rate and have noted technical support levels beneath there around 1.1704 and 1.1664, which are the lows from March and August.

The week ahead is quiet one for Eurozone economic data but offers up to the Dollar U.S. inflation and retail sales numbers for August, although these have little direct bearing on the pending decision by the Federal Reserve on what to do about its own quantitative easing programme.

That would in turn suggest that fluctuating investor appetite for riskier currencies may ultimately be the more pervasive influence on the Euro-Dollar rate this week, which is in turn highly contingent on coronavirus developments in the short-term.

“In Europe, we probably haven’t seen just an inch of the case count surge that is likely to hit the continent during October/November. We are yet to be convinced that continental Europe will make it through the winter without a new round of lock-downs / curfews,” says Andreas Steno Larsen, chief FX strategist at Nordea Markets.

“Back in 2020 the US saw a pick-up in virus cases during summer, while the situation in Europe looked contained. A few months later – especially in October – the case count in Europe went on an absolute tear. It could be that this reflects different seasonality for the spread of the virus. The current Euroboom psychology could thus get dented later this year, weighing on EUR/USD,” Larsen writes in a Friday note.