Euro-Dollar Week Ahead Forecast: Dip Buying

• EURUSD respects overhead resistance
• But setup still supportive
• Dips to be supported near-term
• Fed's Williams curbs bullish enthusiasm

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The Euro to Dollar exchange rate could have recorded a 2.34% advance last week but ultimately failed at a key level and retreated to close the week with a 1.25% gain.

Euro-Dollar rallied to 1.10 in the latter half of last week after the Federal Reserve's apparent policy pivot announced last Wednesday, which "pushed the dollar off a cliff," says a note from KBC Markets.

But the rise failed at 1.10, as a number of technical analysts said might be the case, warning that if history repeats, the pullback could be deep.

"A test of EUR/USD 1.10 was rejected end-November as markets pondered the chance for the ECB to soften its stance, pulling EUR/USD back to the 1.0725 area," says KBC Markets.

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"EUR/USD has rarely stayed outside of 1.04-1.11 this year," says Jeremy Boulton, a Reuters market analyst. "The last rise over 1.10 was followed by a swift drop to the middle of 2023 range."

Explaining the Euro-Dollar's retreat ahead of the weekend, Boulton says, "there is never a bad time to book a profit - this may be a good time."

If the Euro-Dollar's decline is a case of profit-taking, the rally could extend back towards 1.10 over the coming days. KBC Market says a break of 1.10 opens the door to a test of 2023's top of 1.1276.

"Look to buy on dips in the near-term due to impact of weaker U.S. economic data," says Stefan Mellin, Chief Analyst for FX Strategy at Danske Bank, in a note released Monday.

"In the near term, we still see good opportunities for USD weakness on the back of the considerable easing of financial conditions over the past month, in conjunction with bearish USD year-end seasonality," adds Mellin.

Risk sentiment could remain buoyant (which tends to penalise the USD) into year-end after the Fed last Wednesday condoned market bets for several U.S. interest rate cuts in 2024, which contrasts with the more cautious stance towards cuts taken just a day later by the European Central Bank (ECB).

This could mean pullbacks in stocks and Euro-Dollar prove relatively shallow, even if gains above 1.10 are a stretch too far in the coming week.

Triggering profit-taking in EURUSD ahead of the weekend was Fed board member John Williams, who said the Fed would remain data-dependent, and if the trend of easing inflation were to reverse, it would be ready to tighten policy again.

The market interpreted the comments as pushback against the rapid rise in market bets for Fed rate cuts in 2024 that followed the midweek Fed meeting and served as a reminder cool heads must prevail.

There are no major U.S. or Eurozone economic releases due this week and liquidity in the market is likely to thin ahead of the Christmas period.

This ensures market-moving calendar events will be in short supply and could frustrate those looking for a stronger Euro-Dollar.

But, the thin liquidity could result in large short-term moves that offer opportunities on either side of the Euro-Dollar equation, but these are likely to be brief and ultimately faded by traders.

"The euro stands a chance to end the year above 1.10, which seemed quite unlikely only a few weeks ago when the dollar was restrengthening and ECB rate cut bets were rising rapidly. Despite the diverging narratives which emerged from the ECB and Fed meetings last week, probably favouring more attempts at the 1.1000 key resistance into Christmas, a break higher is far from guaranteed," says Francesco Pesole, FX Strategist at ING Bank.