EUR/USD Week Ahead Forecast: Sideways Move to Evolve with A Bearish Bias
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- EUR/USD to probably trade in range with bearish bias
- Medium-term outlook mixed
- Euro to be driven by PMIs; Dollar by Fed meeting
The Euro-to-Dollar rate is trading at 1.1217 at the start of the new trading week, having fallen 1.1% in the previous week. Studies of the charts suggest the exchange rate is set to go sideways with a marginally bearish bias in the days ahead but the ECB's Sintra event and the Fed's mid-week policy decision should deliver some volatility.
Looking at the near-term technical outlook, we note the 4-hour chart shows the pair having rolled over after touching the 7 June 1.1338 highs. The steep decline which followed may have begun a new short-term downtrend.
The pair has completed more than two sets of lower lows and lower highs on the 4hr chart - one of the first signs a new trend lower has begun.
Given the old adage “the trend is your friend,” the move down is more likely than not to continue at least for a little way until it reaches a support level at 1.1175, at which point it will probably go sideways.
The RSI momentum indicator is in oversold territory under 30 and this means there is a heightened chance the pair could bounce or plateau.
Overall we see a good chance that after reaching the top of the descending channel/wedge at 1.1175 the exchange rate will start going sideways in a range between about 1.1150-1.1250, at least in the week ahead.
We use the 4-hour chart for the short-term outlook which includes the next five trading days.
The daily chart meanwhile shows a mixed outlook over the medium-term.
The pair has fallen quite steeply to the 50-day Moving Average (MA) at 1.1218, just slightly above where it ended the week and this may provide a strong floor of support, which could limit further downside.
The close below the MA indicates there is a chance it was breached, and the exchange rate could continue lower.
After the pair has fallen to 1.1175 - assuming that is what transpires - there are two possibilities: it could either break even lower, back into the wedge or use the top of the pattern as a support foundation from which to launch a recovery higher.
There is a chance the 1.1110 lows are a major low and that the pair will recover and go higher in time. Confirmation might come from a break above the 1.1200 or 1.1225 levels with an immediate upside target located at 1.1260 and the key May highs.
The other alternative is the pair continues lower, which would be confirmed by a break below the circa 1.1155 level to a target at the 1.1110 yearly lows.
We use the daily chart to give us an indication of the medium-term outlook which includes the next week to a month ahead.
Looking at the longer-term picture utilising the weekly chart, we see a more bullish configuration as it shows how the pair has just broken out of a channel or wedge.
If it is a falling wedge the breakout is a very bullish sign indicative of a trend reversal, and rise higher in the long-term.
Although gains have been successfully capped by the 200-week MA at 1.1330 the pull-back last week could merely be a temporary setback.
This is our favoured scenario and if it happens the pair will probably rise up to the 50-week MA in the long-term at around 1.1400.
We use the weekly chart to give us an idea of the longer-term outlook, which includes the next few months. So while the setup here is broadly constructive, those waiting for a stronger Euro should exercise patience.
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The Euro this Week: All Eyes on Sintra
The main driver of the Euro is likely to be PMI data with commentary from European Central Bank (ECB) president Mario Draghi and officials also potentially moving the currency.
The composite Eurozone PMI in June, which is a highly regarded gauge of activity in the main sectors of the economy, is likely to show no-change from the previous month’s 51.8, when it is released at 9.00 BST on Friday, June 21, according to consensus estimates.
The PMI is widely seen as a leading indicator for the economy and growth. If it comes out lower-than-expected it will weigh on the Euro and vice-versa if higher.
Individual manufacturing PMI is forecast to show a recovery to 48.0 from 47.7 when it is released at the same time as the composite.
The services PMI is expected to show a rise to 53.0 from 52.1 when it is released, also at the same time.
Expectations for monetary assistance from the ECB will only build if this week's PMI data are disappointing: this would be a negative for the Euro exchange rate complex.
Commentary from ECB’s Draghi could meanwhile impact the Euro when he speaks publicly at 18.00 on Monday, 15.00 on Tuesday and 15.00 on Wednesday.
"Markets will pay attention to President Draghi’s speech at Sintra next week; but already negative rates and uncertainty about future leadership complicate the ECB’s situation," says Christian Keller, an economist with Barclays. "Expectations for ECB policy easing are building as well but already negative rates and uncertainty about future leadership are complicating the ECB’s situation."
'Policy easing' refers to the ECB either cutting interest rate again or increasing their complex quantitative easing programmes: both are technically negative for the Euro.
Sintra, Portugal is the location of the ECB's Forum on Central Banking - an annual get-together of global central bankers. Back in 2017 Draghi and other central bankers signalled the time to tighten monetary policy - I.e. look at cutting quantitative easing and raise interest rates. This coordinated signal prompted some strong trends in global currency markets.
2019 could however see the opposite message adopted.
"Next week markets will certainly search for dovish signals," says Keller. "The extended forward guidance at last week’s ECB meeting to keep rates “at their present levels” until mid-2020 underwhelmed markets, prompting ECB officials in recent days to stress their readiness to act if necessary, be it through rate cuts and/or restarting QE."
The Dollar: What to Watch
The most important event for the U.S. Dollar is the meeting of at the U.S. Federal Reserve's FOMC to decide monetary policy and set interest rates, on Wednesday at 14.00 BST.
The Fed is not expected to cut interest rates but there is an outside chance it may do because of subdued inflation and a negative outlook for the economy.
There is a higher chance it could hint at a possible cut in the near future, either in the statement or via Chairman Powell’s press conference.
The ‘dot-plot’ diagram of Fed member’s future interest rate expectations is also likely to change and reflect a growing dovishness - which means in favour of lower interest rates.
An actual cut or hint of one would weaken the U.S. Dollar by reducing the attractiveness of the country as a destination for foreign capital inflows.
“The Fed will be the first of the three central banks to make its policy announcement next week and is expected to keep the fed funds rate unchanged at the target range of 2.25-2.50%,” says Raffi Boyadijian, an economist at FX broker XM.com. “But with markets convinced that a rate cut at the following meeting in July is a foregone conclusion, traders could be disappointed if the Fed falls short of giving outright signals of lower borrowing costs.”
Such a disappointment would likely trigger Dollar strength.
There is also the possibility the Fed may make a ‘pre-emptive’ cut to interest rates from its current relative position of strength - just in case market fears of a slowdown are warranted.
This surprise would likely send the Dollar lower.
“Regardless of what cards remain to be dealt, the Fed is holding a pretty strong hand. The preponderance of employment data suggests the Fed is meeting its mandate of achieving maximum employment, while inflation is running below expectations. The Fed has room to ease pre-emptively to head off a more substantial pullback in domestic demand and untoward deceleration in inflation,” say economists at Wells Fargo.
Other data is less likely to be of concern as the FOMC will dominate the calendar, nevertheless, building permits and housing starts are forecast to rise marginally in May when the data is published at 13.30 on Tuesday, June 18.
Another major release is the PMI activity indicator for June, out on Friday, June 21, at 14.45.
PMIs are widely seen as a leading indicator for the economy and growth. A lower-than-expected result would weigh on the Dollar and vice-versa for a higher.
Manufacturing PMI is forecast to remain at 50.5 when it is released and services PMI is expected to show a rise to 51.0 from 50.9 in the previous month.
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