EUR/USD Week Ahead Forecast: Hints of a Change in Trend
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- Pair has formed an important reversal bar
- This could mark a change of trend for EUR/USD
- Euro to be impacted by politics; U.S. Dollar by inflation data
The Euro-to-Dollar exchange rate is trading at 1.1197 at the start of the new trading week, just under a half a cent higher than the week before.
The pair has had a volatile past few days in which it fell to record lows for the year of 1.1107 on May 23 but then reversed and surged a cent higher on the last day of the week.
A combination of political and economic risks initially weighed on the single currency but it appears that there has been no populist or ant-EU earthquake delivered by the EU elections.
Results out on Monday morning suggest while the centrist bloc which has long dominated the European Parliament has lost ground there remains a pro-EU majority.
"The Euro has opened the new trading week marginally higher against the Greenback following initial results from the Parliamentary elections in Europe, suggesting that the mainstream have managed to hold ground against the feared outcome of another populist wave in the European Union,” says Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM.
Data-wise, the picture is less supportive: PMI activity data out last week showed a fall in the manufacturing and services sectors when analysts had been forecasting a rise.
From a technical perspective, there is a relatively strong possibility we may be witnessing a major bottom in the pair. Whilst it is too soon to be sure of a reversal of the long-term downtrend the signs are there that this might eventually be the case.
On Thursday, after the new 2019 record lows were achieved the pair rallied strongly and formed in a single day a strong bullish long term reversal bar called a ‘key reversal’.
This pattern usually only occurs when the market makes a major low. It is defined as a one-day reversal. It occurs when the market moves to a new record low reverses on the same day and ends up closing well above the highs of the previous day sometimes even higher.
When a key reversal happens at a multi-year low it can be a good omen (for the Euro; bad for the Dollar).
The same pattern can also occur at market tops, as happened at the 2007 record highs of the S&P500 stock index just before the great financial crisis.
EUR/USD is showing other signs of technical strength which lend validity to the key reversal: the RSI momentum indicator in the lower panel, for example, is showing what is called ‘convergence’, which is a bullish sign. This happens when the exchange rate reaches a new low but the RSI fails to follow suit. It is a classic sign of underlying strength and a harbinger of a move higher.
Despite this compelling signals more confirmation would be useful to corroborate the bullish reversal. EUR/USD has been falling in a descending channel for most of 2019 and a breakout from the channel would be the ideal signal that bulls had taken back control. The 50-day moving average (MA) is at about the same level as the upper channel line at 1.1230 and this is further capping upside for the pair.
Large, popular MAs such as the 50-day provide dynamic levels of support and resistance where the market often hits a ceiling. This happened earlier in May, April and March of this year. It may well happen again in the next few days but if the key reversal is truly signalling a major multi-year low for the pair, the exchange rate should break above this support ceiling and out of the channel.
Such a break would be confirmed by a move above 1.1250, especially a daily close above that level, and that would then open the way for a breakout move higher up to a target at 1.1330, which is based on the height of the channel extrapolated higher.
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The Euro: No Political Earthquake
The main event for the Euro is the result of the European Union elections. The single currency is currently finding support after the anticipated shift in favour of eurosceptic parties was not as great as expected, thus downside pressure has been limited.
"The pro-EU parties maintained their majority, albeit with less cohesion. The centre-left and centre-right majority that has dominated Parliament since 1979 is being replaced by a more divided but still pro-EU bloc of four parties," says Marshall Gittler, a strategist with ACLS Global.
“The Euro has opened the new trading week marginally higher against the Greenback following initial results from the Parliamentary elections in Europe, suggesting that the mainstream have managed to hold ground against the feared outcome of another populist wave in the European Union,” says Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM.
Results indicate some support for populist and Eurosceptic parties but there was no eye-opening blow-out in favour of fringe anti-EU parties.
"This suggests that momentum for the anti-establishment is relatively constrained, at least for now, meaning the Eurodollar should find some initial support from hopes of policy continuity in Europe,” says Ahmad.
On the hard data front, the main release is May economic sentiment data out at 10.00 BST on Tuesday, May 28, but it is unlikely to read much differently from the recent disappointing PMI survey results which showed declines where the market had expected gains. Expectations are currently for a gentle slide in Industrial, Services and Business sector sentiment.
Some key German data is also scheduled for the coming week. German CPI is out on Friday at 13.00 BST and could provide a heads up of what to expect for the whole Eurozone. Current estimates are for it to show a slight slowdown to 0.3% month-on-month after a 1.0% gain in April.
The higher the result the better from the perspective of the Euro as it is more likely to raise interest rates which have a direct impact on the currency. Higher interest rates are appreciative because the attract greater net inflows of foreign capital.
The Dollar: What to Watch
The main release for the U.S. Dollar in the coming week is the Personal Consumption Expenditure Index (PCE), which is the preferred inflation gauge for the Federal Reserve (Fed) since consumers contribute the largest share of economic growth in the U.S.
If PCE rises is means consumers are spending more and is a sign inflation could be on the rise. The Fed then usually responds by putting up interest rates, which often result in a rise in the currency due to increases net foreign capital inflows.
The PCE in April is forecast to rise by 1.6% compared to a year ago and 0.2% compared to a month ago, when data is released at 13.30 on Friday, May 31. This compares with 1.6% and 0.1% respectively for March. If the result is in line with expectations it is unlikely to impact on the Dollar much given the rate is little changed from the March figure, but if it is higher it could spark a rally, and if lower a decline.
“Should the core PCE price index fail to head higher over the next few months, or worse, drift further lower, pressure would grow on the Fed to cut rates,” says Raffi Boyadijian, an economist at FX broker XM.com.
Another major release for the Dollar will be the second estimate of Q1 GDP growth figures, which is forecast to show a slight slowdown to 3.1% from the flash estimate of 3.2%, when it is released at 13.30 on Thursday, May 30.
If GDP is revised down more-than-expected, the Dollar could suffer because it will reinforce the existing negatively biased outlook; if it rises unexpectedly the Dollar could resume its uptrend.
Beyond these releases, there is a welter of housing data, with the S&P Case-Schiller Composite 20 house price Index forecast to show a slower 2.8% rise when it is released at 14.00 on Tuesday and pending home sales at 15.00 on Thursday which are forecast to rise 0.5% from 3.6% previously, in April.
The other key release for the Dollar is the Conference Board’s consumer confidence index due on Tuesday, which is forecast to edge up from 129.2 to 129.8 in May.
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