EUR/USD 5-Day Forecast: Marginal Bullish Bias
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- EUR/USD breaks out of channel again but only just
- Euro to be driven by ZEW survey
- Dollar eyes retail sales
The Euro-to-Dollar exchange rate is trading at around 1.1270 at the start of the new trading week, after rising 0.41% from the week before.
Studies of the charts suggest the exchange rate is finely balanced with a marginal upside bias over the next 5 days.
The 4-hour chart - which is used for the short-term outlook including the next five trading days - shows how the pair has gone up and down in a random walk over recent weeks and the lack of a directional trend makes forecasting the next move difficult.
There is a risk the pair could continue unfolding in the sideways range between 1.1285 and 1.1240, however, equally it could break out either higher or lower.
Overall we see a marginal bias towards an upside breakout to a target at 1.1350. Such a move would be confirmed by a break above 1.1285.
A close up of the current price action adds further bullish clues which favour an upside breakout.
The pair may have formed a bullish flag price pattern after rising up off the July 8 lows. This suggests a breakout higher could run as high as an extrapolation of the length of the ‘pole’ higher.
Another hint the pair could be going higher is the fact a long-term trendline - the upper channel line of a descending channel, is providing underpinning support as the recent pull-back stopped on it and couldn’t break lower.
The daily chart shows that after breaking out of its descending channel the pair has lost upside momentum and has started zig-zagging up and down.
It is possible the pair could continue this pattern over the medium-term, however, there is also on the daily chart a marginal upside bias too.
The pair broke back down inside the descending channel several weeks ago but last week it broke back outside of it and has gained a little foothold above the upper descending channel line which is a small positive indicator of potentially more upside to come.
Unfortunately mon the RSI momentum indicator is weak and doesn't back up the bullish forecast. It is now lower than where it was at the June trough in price which was slightly higher. The divergence is negative but also marginal.
A break above the June high at 1.1412 would lead to a continuation higher to a target at 1.1450-60.
A slightly less likely scenario is that the pair breaks below the June lows at 1.1180 and falls to 1.1110.
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 broke out of its descending channel or falling wedge pattern, fell back inside and now has broken out again, just about.
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.
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's Week Ahead: ZEW Survey
The main releases in the week ahead for the Euro are trade balance data due out on Tuesday, the ZEW sentiment index also on Tuesday and the second estimate of June inflation data due on on Wednesday,
The ZEW is a survey based sentiment indicator which asks 350 financial professionals for their views on the outlook for the economy. There is ZEW for Germany and the Eurozone.
The ZEW for the Eurozone unexpectedly plummeted to -21 in June when forecasters had expected it to only fall to -3.6. It is expected to stay at a similar level in July of around -20.0. The release is out at 10.00 BST on Tuesday morning.
A worse-than-expected result would be negative for the Euro and vice versa for a better result.
Inflation data is forecast to stay at 0.1% on a monthly basis in June when the second estimate is released on Thursday at 10.00. CPI is forecast to have risen 1.2% compared to a year ago.
Core inflation is forecast to remain at 1.1% compared to a year ago.
Inflation recovered in June, with core inflation rebounding a surprising 30 basis points from 0.8% to 1.1%, so investors will be watching as to whether these gains can be sustained through the revisions.
Despite inflation being viewed by traditional economics as a negative effect, higher inflation would actually support the Euro due to the impact inflation has on interest rates and therefore net foreign capital inflows.
The Eurozone trade balance has been trending lower over recent years. It came out at 15.7bn Euros in April and investors will probably be expecting a lower figure in May as trade winds bite. The impact on the Euro is likely to be marginal if any, as the metric is a background influencer of economic conditions rather than a direct driver itself.
The Dollar: What to Watch this Week
The main release for the U.S. Dollar in the coming week is retail sales in June. The data is important because consumer spending remains the main contributor of growth in the U.S.
The Dollar has been under pressure recently due to expectations that the Federal Reserve is preparing to cut interest rates as a pre-emptive ‘insurance’ strike against future economic weakness.
An interest rate cut is likely to weigh on the Dollar since lower interest rates attract less net capital inflows from foreign investors looking for somewhere to park their money.
Only an extremely strong retail sales result would even begin to reverse expectations the Fed is getting ready to cut interest rates, and that seems unlikely according to analysts who are more biased to expecting a slowdown, albeit a modest one.
“In America, retail sales on Tuesday will provide the last piece of evidence on the consumer, before the Fed’s two-week ‘quiet period’ begins ahead of the July 31 rate decision. Forecasts suggest that retail sales slowed on a monthly basis in June, but remained in positive territory for a fourth straight month, which would be encouraging in itself.”
The data is out on Tuesday at 13.30 BST and is expected to show a 0.2% rise both in the core and the broader metric.
Other key data for the U.S. in the coming week is Michigan Sentiment indicator which is forecast to show a slight uptick to 98.5 from 98.2 in July when it is released on Friday at 15.00; and housing data which is forecast to show a slight fall in housing starts to 1.262m from 1.269m previously when it is released on Wednesday at 13.30.
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