Euro-Dollar Week Ahead Forecast: Supported Near 1.15 as USD Struggles with Resistance

- EUR/USD supported at 1.1495 & may attempt rebound
- As USD tires in struggle with major resistance on charts
- ECB speech in focus for EUR as USD eyes Oct CPI data

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The Euro-to-Dollar exchange rate entered the new week having reversed Friday’s loss and with potential scope to stabilise further over the coming days should the Dollar continue to show signs of tiring in a four-month rally against major counterpart currencies.

Europe’s single currency set new 2021 lows against the greenback on Friday before the Dollar eased up on many counterpart currencies in the wake of November’s non-farm payrolls report, which cast the U.S. labour market in a much more robust light than it was viewed previously.

Coming hard on the heels of the Fed’s decision to wind down its quantitative easing programme over the eight months to the middle of next year, Friday’s data initially benefited the Dollar, although the U.S. unit was seen in broad retreat ahead of the weekend.

While many analysts and investors remain bearish on the outlook for EUR/USD, it set a new low by only a hair’s breadth last week while the Dollar Index measure of the greenback against a basket of other major currencies spent its fourth week stymied by technical resistance on the charts.

“We are maintaining a short EUR/USD trade idea. The trade idea has got off to a good start as EUR/USD has fallen back to a new year to date low of 1.1514,” says Lee Hardman, a currency analyst at MUFG, who’s been a seller of the Euro-Dollar rate from 1.1650.

Above: Euro-Dollar rate shown at daily intervals.

• EUR/USD reference rates at publication:
  Spot: 1.1570
• High street bank rates (indicative band): 1.1167-1.1250
• Payment specialist rates (indicative band): 1.1468-1.1514
• Find out about specialist rates, here
• Or, set up an exchange rate alert, here

“We continue to expect EUR/USD to trade heavy heading into year-end on the back of monetary policy divergence between the ECB and Fed. The main risk would be a policy surprise from the ECB on 16th December when they are due to unveil their QE tapering plans for next year,” Hardman also said.

The seemingly tiring U.S. Dollar Index and Friday’s sharp rebound by the single currency could indicate that a period of stabilisation, if not a further corrective recovery is in store for the Euro-Dollar rate during the week ahead.

This is after Chairman Jerome Powell suggested last week that the Fed is unlikely to be spooked out of its interest rate stance by recently increased inflation rates, after saying in November’s press conference that the bank could afford to wait patiently until the third quarter 2022 for inflation to fall.

“We have been arguing that the timing and pace of QE tapering depended on the progress in the labor market, but that the timing and pace of rate hikes will depend on whether and how fast inflation comes down as base effects fade next year. We repeat that getting US inflation right is the most important call for next year,” says Athanasios Vamvakidis, head of FX strategy at BofA Global Research, in a note last week.

Despite the Fed’s professed patience with inflation that has surged in recent quarters as a result of mainly temporary factors, the greenback and Euro-Dollar rate could both be sensitive this Wednesday to the outcome of October’s U.S. inflation data.

Above: Euro-Dollar at monthly intervals with major moving-averages and Fibonacci retracements of 2020 recovery indicating possible areas of technical support and resistance.

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“Growth in consumer prices continues to be affected by very low year-ago prices. Nearly half of the increase in the CPI relative to pre-COVID levels is being driven by a small number of components such as used cars and energy, both of which likely moved higher again in October,” says Nathan Janzen, a senior economist at RBC Capital Markets.

The data is due out on Wednesday at 13:30 and will be watched closely by the Dollar, although before then the Euro-Dollar rate’s attention will be taken up by Tuesday’s ECB Forum on Central Banking where European Central Bank (ECB) President Christine Lagarde will deliver opening remarks at 13:00.

Tuesday’s address comes less than a week after President Lagarde said in a speech at a celebration of the 175th anniversary of Banco de Portugal in Lisbon that there’s little if any prospect of an interest rate rise in the Eurozone next year.

With that aside there’s little to occupy the Euro-Dollar rate in the economic calendar for the coming days.

“The conservative hold by the Bank of England clearly had an impact beyond the UK's borders, and particularly on the ECB rate expectations, as markets scaled back tightening bets and no longer see an ECB rate hike in 2022,” says Chris Turner, global head of markets and regional head of research for UK & CEE at ING. “EUR/USD should therefore be driven almost solely by the dollar.”

Above: U.S. Dollar Index at weekly intervals with major moving-averages and Fibonacci retracements indicating possible areas of technical resistance.