EUR/USD Rate Week Ahead Forecast: Bearish
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The Euro-to-Dollar rate is trading at 1.1232 at the start of the new week having declined over a percent in the week prior.
EUR/USD has broken back down below the November 2018 low and hit a new yearly low 1.1176, most of the weakness came from the European Central Bank (ECB) meeting that confirmed interest rates will not likely be raised until December 2019.
Previously, a rate rise was expected towards September, the U-turn in policy stance was a reaction to the slowdown gripping the Eurozone. Currencies tend to rise in anticipation of higher rates, therefore the policy stance at the ECB is unsupportive of the single-currency at the current juncture. We have heard from a number of currency analysts that the bearish shift in stance at the ECB has seen them lower their foreacsts for EUR/USD.
The technical outlook is bearish.
The pair has now temporarily broken out of the range it was in and fallen to new lows, however, a break below the 1.1176 Thursday low would be ideal for confirmation of an extension down to a target at 1.1110 at the S2 monthly pivot, a level with a significant support value.
The 200-week moving average (MA) has been holding up price action for several years now, but last week’s price pierced right through it and closed lower, suggesting the MA may not be able to support prices effectively any longer - a bearish sign - which could open the way to much lower levels.
One not-so-bearish feature of the weekly chart, however, is the RSI momentum indicator in the bottom panel which is actually a little high and appears to be converging bullishly with price action, which is declining. This non-confirmation from momentum suggests a lack of bearish momentum which could result in rebound higher.
The daily chart does not show the same level of non-confirmation with RSI momentum, but rather, instead, it shows momentum falling in lock-step with the exchange rate, which is a more bearish indicator. The RSI is looking a little oversold which is not a bearish sign but it is still not sufficiently oversold to lead to a high probability of a bounce.
The slight recovery on Friday is a little unconvincing as it did not manage to climb back above the level of the November lows and still looks vulnerable to collapse in the coming week should the exchange rate move back below the 1.1176 level.
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The Euro: What to Watch
Despite the European Central Bank's negative assessment of the economic outlook last week, talk of green shoots appears to be raising hopes of a recovery in the Euro-area, and for evidence of this, analysts will be watching industrial production figures more closely than otherwise.
Industrial production in January, therefore, is a key release, which is forecast to show a 1.0% rise from -0.9% previously, when it is published at 10.00 GMT on Tuesday.
A beat on expectations could prove positive for the single-currency in the near-term and work against the thrust of the technical forecast presented above.
Traders could get an early idea of the Eurozone-wide result from how well Germany has done, as German industrial production data is out on Monday at 7.00, and is forecast to show a 0.5% rise from -0.4% in the prior month.
"Despite weak headline production data, manufacturing sales data have been strong for 2 months now and pressures are building in the pipeline. We expect bottlenecks in Germany to have largely worked off in January, allowing IP to rebound very strongly, and reflecting strength seen elsewhere in last Friday's data," say TD Securities in a week-ahead preview.
If this prediction is correct the Euro's week could start on a strong note.
Apart from that, there is also a meeting of the Eurogroup of finance ministers which may result in some headlines, and speeches from ECB governing council members such as ECB’s Lautenschlager on Tuesday, and Mersch, Angeloni, and Coeure on Wednesday.
The Dollar: What to Watch
Inflation data is going to be a key influence on the U.S. Dollar this week with data for February out on Tuesday at 12.30 GMT.
Headline inflation is forecast to stay unchanged at 1.6% year-on-year with core CPI also projected to hold steady at 2.2%. Higher-than-expected CPI or Core CPI could drive up the Dollar and vice versa for lower.
The producer price index (PPI) out on Wednesday at 12.30, meanwhile, is expected to stress the absence of inflationary pressures which could weaken the Dollar. PPI for final demand is forecast to fall to 1.9% from 2.0% in January. Also out on Wednesday are durable goods orders for January.
Another key release for the Dollar is retail sales on Monday. This came out sharply lower in December after U.S. Consumers tightened their belts. Retail sales are forecast to have risen by a modest 0.2% month-on-month in January, however, recovering partially from December’s 1.8% tumble. A worse-than-expected figure would only renew fears of weakening consumer spending which could weigh heavily on the Dollar.
Data for U.S. industrial output, released at 13.15 on Friday, is estimated to have grown by 0.4% month-on-month in February, while the more forward-looking Empire State manufacturing index is expected to improve from 8.8 to 10.0 in March. Other releases on Friday include the University of Michigan’s preliminary reading of consumer sentiment for March as well as the JOLTS job openings for January.
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