EUR/USD Exchange Rate in the Week Ahead: Possibility of Trend Reversal
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- EUR/USD may have reversed trend and moved lower
- Break below June lows would be critical
- Euro to be driven by ECB minutes; Dollar by Fed commentary
The Euro-to-Dollar rate is trading around 1.1224 at the start of the new trading week, after falling 1.25% from the week before. Studies of the charts suggest the exchange rate may now be poised to fall even further over the coming 5 days.
The 4-hour chart - which we use to forecast the short-term outlook which includes the next five trading days - shows how the pair has fallen since the beginning of July and possibly even reversed trend. The sequence of two lower lows and lower highs is indicative of a potential reversal of the trend.
The pair has broken back inside the descending channel it was previously in and that was a very bearish sign.
A break below the June lows at 1.1181 would signal a probable extension lower to a target at the major May lows at 1.1110.
The RSI momentum indicator is in the oversold zone which indicates there is a risk of a bounce or sideways move evolving.
The daily chart shows more clearly how the pair has fallen back inside its descending channel (circled). This was an unanticipated and bearish sign for the pair overall.
The pair also broke below the 50-day moving average (MA) and then closed below it - another bearish sign.
We see a chance the pair could continue lower to a target at 1.1110 and the May lows. After that, the pair will probably bounce and enter a sideways trend between the May and June lows.
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 and then back into its descending channel or falling wedge pattern. The fact it fell back in has negated the prior bullish bias.
A break above the June highs at 1.1418 would reinvigorate the bullish case and probably see the uptrend extend up to a target at 1.1560 and then 1.1800.
Alternatively, there is a chance the downtrend could extend as already indicated on the 4hr and daily charts if the pair breaks below the Junes lows, and could break even lower than the June lows to a target at 1.1000.
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 this Week
The main release for the Euro in the coming week will most probably be the release of the minutes of the June European Central Bank (ECB) meeting which will be scrutinised for signs of what the ECB’s future policies are likely to be.
Analysts will mostly be looking for signs that more members of the governing council are calling for an increase in monetary policy stimulus.
If so, then the Euro will weaken.
“At the June meeting, the ECB refrained from adopting a clear loosening bias even though President Draghi did say some members raised the possibility of a rate cut. The account of that meeting, to be published on Thursday, should provide some insight into those discussions,” says Raffi Boyadijian, an analyst with XM.com. “Although there have been several signals since the June meeting, including from Draghi himself, that additional stimulus may be on the cards, a dovish account could still pressure the euro, which this week slipped back below $1.13 on declining Eurozone bond yields.”
The minutes are scheduled for release at 12.30 BST on Thursday, July 11.
The other main data release for the single currency is industrial production both in Germany (on Monday) and then for the whole of the Eurozone, on Friday.
The current downturn in the Euro-area economy has been mainly driven by a slowdown in Manufacturing.
“The slowdown in the Eurozone economy has been defined by a lagging manufacturing sector and a resilient service sector. This is perhaps best illustrated in Germany, Europe’s biggest economy and manufacturing powerhouse. Factory orders in Germany are contracting at a pace not seen since the Great Recession,” says a weekly economics preview from investment bank Wells Fargo.
German industrial production is forecast to show a 0.4% rise in May after a contraction in April, when it is released at 7.00 BST.
Eurozone-wide is forecast to show a 0.2% rise when it is released at 10.00 BST, on Friday.
“On a year-over-year basis, industrial production was down 0.4% in April, but this small decline masks worrying trends in the details. Capital goods and durable consumer goods production were down 1.2% and 0.8%, respectively, partially made up for by growth in non-durable goods. Another decline in industrial output broadly and cyclically-sensitive sectors specifically would be a poor sign for the Eurozone economy,” says Wells Fargo.
Such a decline would also, probably weigh on the Euro.
The Dollar: What to Watch this Week
The main driver of the U.S. Dollar in the week ahead is likely to be speculation about future monetary policy triggered by commentary from Jerome Powell, the chairman of the Federal Reserve (Fed), when he delivers his semi-annual testimony to both Congress and Senate committees on Wednesday and Thursday respectively.
He is likely to reiterate the Fed’s more dovish June meeting message that it stands ready to lower interest rates should worsening economic conditions warrant it.
The shift in tone from the Fed has coincided with a spell of Dollar weakness, confirming hints of interest rate cuts over coming months tends to play negative for the currency.
After the strong rebound in June Non-Farm Payrolls, shown in Friday's data, he has reason to maintain a balanced message and there is a risk he may even have revised up his assessment, which would support the U.S. Dollar.
This is because the labour market is a key barometer of the health of the economy.
The minutes of the June Fed meeting are published on Wednesday and will provide further insight into Fed officials’ thinking on the trajectory of future monetary policy.
If there are any signs from the minutes that Fed members were especially dovish (meaning in favour of lower interest rates) this could weigh on the Dollar and vice versa if they were surprisingly hawkish (meaning in favour of higher interest rates).
There may also be scrutiny of the details of monetary policy tools. The Fed is currently reducing the number of bonds on its balance sheet by allowing them to mature and not reinvesting the proceeds when they do. This is a form of de facto tightening which the Fed could soon decide to conclude.
“In regards to the meeting minutes, interest will be high for any additional details on the balance sheet that could suggest an earlier end to tapering or further discussions on the equilibrium size and composition,” says an economic preview note from Wells Fargo.
The other major release is inflation data in the form of CPI and factory gate prices or PPI out on Thursday and Friday at 13.30 BST respectively.
CPI is forecast to come out at 0.0% in June from 0.1% previously and Core CPI to show a 0.2% rise from 0.1% in the month before.
On a yearly basis CPI is expected to remain at 2.0%.
Inflation is important because it informs monetary policy which is a direct driver of currencies especially G10 currencies. Although traditionally viewed as something negative for the economy, higher inflation is often positive for currencies as it drives up interest rates, and higher interest rates are a magnet for international capital.
“While the CPI numbers are not anticipated to be of much significance to investors’ pricing of a rate reduction by the Fed at the end of this month, weaker-than-expected figures would only reinforce the view that the US central bank will ease policy and this would keep the US Dollar on the backfoot,” says Raffi Boyadijian, an economist at FX broker, XM.com.
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