Euro-to-Dollar X-Rate Trading Inside Extended Range With Marginal Upside Potential: The Week Ahead Forecast

Image © European Central Bank.

- EUR/USD range bound between 1.1250 and 1.1500

- Slight bias for a bullish resolution if breakout

- Main release for Euro is CPI data; for US Dollar payrolls

The EUR/USD exchange rate is to commence the new week from 1.1440, having risen about a half a percent in the previous week.

The pair is trading within a sideways range which will probably extend and there is very little to suggest a preference for one direction over another. The pair is trading at the top of the range at the moment and although there is a risk of a topside breakout, it could also just as well touch the ceiling and decline back down to the range floor.

Only a clear breakout above the highs of 1.1500 would confirm a more directional environment, to an initial target at 1.1635.

Despite the neutral look and feel, there are some indications supporting a more bullish outlook, and if forced to choose, would probably opt for a more bullish bias.

One positive indicator is that the weekly chart is showing a ‘key reversal’ candlestick pattern at the recent November lows which is quite a strong bullish indicator. Unfortunately, this one was not followed by a bullish rally, although there is a chance this could still happen.

Another bullish feature of the weekly chart is the 200-week moving average which has been acting as a support to the exchange rate since the formation of the key reversal. This is an added ‘safety net’ for the price which is likely to help prop it up against further weakness.

The four-hour chart also has bullish features, as it is showing an established sequence of higher highs and higher lows which could signify the short-term trend is now up. It marginally biases the outlook to suggesting more gains on the horizon at least up to the top of the range, if not higher.

A clear break above the range highs, signified by a move above 1.1525 would probably lead to an extension up to an initial target at 1.1635.

Those watching the Euro and Dollar for international payment purposes, note that while the spot rate is at 1.1440, banks are seen offering an exchange rate in the region of 1.1040-1.1120, independent currency specialists are seen offering in the region of 1.1340-1.1380.

The Dollar: What to Watch

The main release in the week ahead for the US Dollar is Non-Farm Payrolls which is forecast to show a 180k rise in December when it is released on Friday, January 4, at 13.30 GMT.

Other important data released at the same time is the unemployment rate, which is expected to remain at 3.7%, and average hourly earnings is out at the same time and forecast to show a 0.3% rise in December compared to a month ago.

Employment metrics are especially sensitive to economic conditions and given current qualms about the state of the US economy acting as a drag on the US Dollar could impact if they show a wide miss from expectations.

In relation to next week’s releases, analyst Marios Hadjikyriacos at brokerage XM.com sees them as critical in feeding into the current debate about the Federal Reserve (Fed) and the extent to which it will continue with its tightening bias (and therefore pro-Dollar) in 2019.

“The question is whether such figures will be enough to alter the dovish expectations around the Fed, which according to market pricing, is not expected to touch the hiking button at all next year,” says Hadjikyriacos. “Investors seem confident that the latest housing market slowdown will spill over into slower growth in the broader economy soon, keeping the Fed away from hiking.”

In relation to the debate around what the Fed is going to do next year, is likely to be commentary from Fed Chairman Powell when he participates in a debate on Friday, January 4, at 15.15.

“It will be interesting to hear what Fed Chair Powell has to say when he participates in a panel discussion in Atlanta on Friday, and whether he will acknowledge the massive divergence between what his central bank signaled recently (two hikes in 2019), and what markets expect (zero hikes),” say Hadjikyriacos.

The ISM Manufacturing PMI for December is also a major release for the US. It is forecast to show a decline to 58.0 from 59.3 when it is released at 15.00 GMT on Wednesday, January 02. The ISM is a reliable leading indicator for the economy so a greater than expected decline would impact negatively on the Dollar, and vice-versa for a rise.

Those looking to lock in a good EUR/USD exchange rate ahead of a potentially volatile month and year should do so over coming days as we expect volatility to be relatively low ahead of a busier January. If you lock in an exchange rate for a major international payment you can set aside any concerns on what this volatility might deliver, find out more here.

Marshall Gittler, a market veteran and currently strategist with ACLS Global says January tends to be the most volatile time of the year in the FX market.

"That’s probably because investors who’ve wound down their activity ahead of the year-end book closing rush in to take new positions. Many hedge funds traders for example basically step back from the markets in early December so as not to jeopardize their bonuses for the year. Then in January they start up with a vengance, taking positions that they hope will net them profits over the year," says Gittler.