EUR/USD Week Ahead Forecast: Bull-Flag Signals Next Leg of Uptrend Imminent
Image © Pound Sterling Live
- EUR/USD forms bullish flag pattern
- Indications are new uptrend will continue evolving
- Euro to be driven by unemployment data; Dollar by payrolls and earnings
The Euro-to-Dollar exchange rate is trading at around 1.1368 at the start of the new trading week, virtually unchanged from the week before. However, studies of the charts suggest the exchange rate will probably rise in the days to come.
The 4-hour chart shows how the pair has formed a bullish flag pattern since basing on June 17. As the name suggests the flag pattern looks like a flag and consists of a steep rally or ‘pole’ section followed by a sideways piece which represents the actual flag square.
The expectation is for the flag to break to the upside and rise the same distance again as the pole. This indicates a probable move up to the key January highs at 1.1575. In the short-term, however, it might only get as far as the 1.1495-1.1500 level before hitting a temporary ceiling.
A break above the 1.1412 highs would probably green light the bull-flag breakout higher and the extension up to the aforesaid target.
The RSI momentum indicator is a little bit weak but not enough to negate the bullish forecast.
We use the 4-hour chart for the short-term outlook which includes the next five trading days.
The daily chart shows the same bull flag as highlighted on the 4hr chart, with the second longer-term target at the January highs.
After the pair reaches the highs at 1.1575-1.1600 we think there is a high chance the pair could pause, pull-back, and start going sideways for the duration of the medium-term.
We use the daily chart to give us an indication of the outlook for the next week to a month ahead, which we define as the medium-term.
The weekly chart shows how the pair has broken out of a falling wedge pattern at the bottom of a downtrend. This is a very bullish pattern and suggests a strong move higher on the horizon for the pair.
We see a possibility of a new longer-term uptrend evolving and taking the pair up to the next key resistance level at 1.1800, at the September 2018 highs.
We use the weekly chart to give us an idea of the longer-term outlook, which includes the next few months.
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The Euro: What to Watch
There is not a lot of data out for the Euro in the coming week, but what data there is could garner more than the usual amount of attention.
This is because Eurozone inflation in June jumped surprisingly to 1.1% from 0.8% previously, reflecting increased demand and potentially upending expectations of ECB easing.
Investors will, therefore, be watching whether other metrics support the strong uptick in inflation or not. If they do, the Euro could rally on the back of hopes of a recovery in the region.
Eurozone unemployment is out on Monday at 10.00 BST but is not forecast to change from the 7.6% previous result. If it falls the Euro could gain a boost.
Eurozone retail sales is expected to show a rise of 0.4% in May (mom) when it is released on Thursday at 10.00 BST. This would mark an improvement from the -0.4% registered in April.
German factory orders and industrial production are forecast to show a -0.2% and -0.4% fall (mom) in May when they are released on Friday at 7.00 BST. For factory orders this would constitute a slowdown from the 0.3% previously and for industrial production a -1.9% decline previously.
The Dollar: What to Watch this Week
The main release for the U.S. Dollar in the week ahead will probably be U.S. labour market statistics for June, in which the non-farm payroll release is forecast to show a 164k rise in new jobs created compared to the rather low 74k registered in May, when it is released at 13.30 BST on Friday, July 5.
If non-farm payrolls are low - by which we mean below 100k - it could lead to a fall in the U.S. Dollar as it will stoke economic slowdown fears and indicate that the U.S. Federal Reserve has reason to consider cutting interest rates over coming months. Last month's data were much lower than expected and came out at only 74k. If it registers a low reading for two months in a row it could suggest a sharper-than-anticipated slowdown on the horizon.
Average hourly earnings are forecast to rise by 3.2% and 0.3% on a yearly and monthly basis respectively in June when they are released at the same time as NFPs.
Earnings are a key metric because of their influence on inflation. In theory, when earnings rise people spend more and it drives up inflation as well as supporting growth. This leads the central bank to raise interest rates which boost the currency.
Higher interest rates increase net foreign capital inflows by making the country a more attractive destination for investors to park their capital, and this boosts demand for the currency.
Other key releases are ISM manufacturing and non-manufacturing reports, the latter of which is forecast to fall to 56.1 from 56.9 in May, when it is released at 15.00 on Wednesday, June 3. A result above 50, however, still suggests growth rather than contraction.
The reports are compiled by the Institute of Supply Managers (ISM) from surveys of their members and provide a timely insight into activity levels in different business sectors.
They are seen as a reliable leading indicator of broader economic growth and changes in the ISM often precede changes in GDP.
Another major release for the Dollar is the trade balance for May which is forecast to show the deficit widening to -53bn from -51bn previously when it is released at 13.30 on Wednesday.
A deeper trade deficit is long-term negative for the U.S. Dollar as it suggests greater demand for foreign products than for U.S. products, and therefore relatively less demand for the U.S. Dollar in order to buy them.
It also indicates lower growth since deficits are negative for growth (GDP).
A wider deficit is more likely to lead to a prolonged and broader trade war between the U.S. and its trading partners since it was the avowed intent of the current administration to narrow the deficit, which led to the current conflict with Beijing.
A ratcheting-up of trade tensions could weigh on global growth and increase risk aversion, with a complex but probably negative impact on the Dollar.
The highly anticipated meeting between Trump and Xi Xinping at the G20 conference on Saturday, June 29, resulted in a small concession from President Trump which allowed U.S. companies to sell equipment to Huawei.
Beyond that, however, there was no change to the current arrangements, although the U.S. said it would not increase tariffs on any more Chinese goods, as it had previously been threatening to.
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