The Euro-to-Dollar Rate in the Week Ahead: Running Out of Road

Image © European Union 2018 - European Parliament, Reproduced Under CC Licensing.

- EUR rises to, then rejected by 50-day moving average.

- Top of descending channel now stymies further gains.

- Data focus for Euro is ZEW; retail sales are up for USD.

The Euro-to-Dollar rate is set to begin trading around 1.1232 Sunday after rising by a quarter of a percent during the previous week, although studies of the charts suggest further upside may be increasingly difficult for the single currency to attain over the coming days.  

Europe's currency benefited from a weakening of the Dollar last week, which was hurt by President Donald Trump's decision to increase from 10% to 25% the tariffs levied on U.S. imports from China. 

From a technical perspective, the signals for EUR/USD are mixed. The pair has now undergone two weeks of recovery, but it's done so while still within a descending channel and the market was recently repelled at the 50-day moving average located around 1.1251. 

The 50-day average is now likely to act as a hard ceiling above which further gains are unlikely. But that's not the only impediment to further progress by the Euro, because the current market price is also close to the upper border of the descending channel. 

This upper border is a place where prices have reversed many times before so there is some chance the exchange rate could simply reverse and start falling again soon. However, there is no evidence yet that the trend is about to turn lower. We retain a neutral view until the next stage of the trend emerges. 

Above: Euro-to-Dollar rate shown at daily intervals.

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The Euro: What to Watch

The main driver of the Euro in the week ahead will probably be the escalating trade war between the U.S. and China.

The Euro was among the strongest risers against the Dollar towards the end of last week following news the White House had increased tariffs on some Chinese goods exports to the U.S. 

China has said it will retaliate against the U.S., but talks between the two countries are still ongoing so there remains some chance the whole situation can be brought back under control. 

On the economic data front, the only release likely to stir the market is the German ZEW economic sentiment index, which is a forward-looking indicator that measures sentiment among 350 German institutional investors.

The ZEW has shown some improvement over recent months and if it continues it could be seen as an early ‘green shoot’ for the economy, which may bode well in the future. The Eurozone has been showing possible signs of a gradual recovery recently and a strong ZEW would back this up.

 Above: ZEW index history. Source: Investing,com.

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The Dollar: What to Watch

The main release for the Dollar in the week ahead is retail sales data for April, which is forecast to show sales growth slowing to 0.2% that month, down from 1.6% growth back in March.

“With consumption making up about 68% of US GDP, a negative surprise in the retail sales data would not do the US Dollar any favours, especially now that investors have started to once again raise their expectations of a Fed rate cut by year-end as a US-China trade deal hangs in the balance,” says Raffi Boyadjian, economist at FX broker XM.com.

The other two major releases in the coming week are industrial production, which is forecast to remain flat (0.0%) in April at 14.15 on Wednesday and Housing Starts, which are forecast to show a 6.2% rise month-on-month in April when they are released at 13.30 on Thursday.

“Consumers were able to regain some lost confidence after some positive developments in equity markets. Despite the strong data in March, it was not enough to prevent real consumption growth from slowing in the first quarter—PCE grew at an annualized pace of 1.2%. We look for a 0.2% increase in April retail sales,” says Sarah House, an economist at Wells Fargo.

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