EUR/USD 5-Day Forecast: Resumption of Downtrend to Continue
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- EUR/USD falls as longer-term downtrend resumes
- Pair reaches new lows for the year
- Euro to be moved by GDP data
- Dollar eyes FOMC meeting
The Euro-to-Dollar rate is trading at around 1.1124 at the start of the new trading week, after falling 0.85% in the week before.
Studies of the charts suggest the exchange rate has resumed its downtrend and is at risk of further weakness in the week to come.
The 4-hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair in an established and lengthening downtrend.
At the end of last week it fell back down to the April and May lows which it briefly pierced below to form a new low of the year at 1.1101.
This downtrend is likely to extend lower in the short-term, with a break below 1.1101 providing confirmation, and the next target lying at 1.1040 at the lower borderline of the falling wedge.
The daily chart - used to give us an indication of the outlook for the medium-term, defined as the next week to a month ahead - shows how the pair has been declining since the June highs.
This downtrend is likely to continue due to the principle that the already established trend is more likely to extend than not, encapsulated in the trading axiom “the trend is your friend.”
A fall to 1.1040 and the base of the wedge is therefore expected, however, at that level the pair will probably bounce and may rise back up to the 1.1100 level of the April/May lows. This is due to a characteristic of charts that former support levels tend to become resistance levels after they have been broken.
The RSI momentum indicator is corroborating the bearish outlook as it too has fallen to new lows in line with the exchange rate and this is a bearish sign.
The weekly chart - used to give us an idea of the longer-term outlook, which includes the next few months - shows the falling wedge pattern at the end of a downtrend.
This is actually, normally a bullish pattern but the breakout in June turned out to be false and the price has fallen back inside the wedge.
It now looks like the long-term downtrend is set to continue lower to a target at 1.1000 in the long-term. This is a major round-number and is therefore likely to be a focus for investors with bearish bets to take profit and buyers to come in thinking the Euro offers good value at that level.
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The Euro: What to Watch
The main release in the week ahead for the Euro will be GDP data for the second quarter which is expected to have grown by 0.2% in Q2 and 1.0% compared to a year ago. GDP above inflation, that is.
Such a result would be in line with current ‘barely a pulse’ estimates for Eurozone growth. A lower-than-expected result, however, would further solidify expectations the ECB will use its bazooka in September to reflate. Such a move would be detrimental to the Euro.
Although Manufacturing PMIs have fallen to Eurozone debt crisis levels their Services counterparts have remained relatively resilient.
“The advance release for Eurozone real GDP growth in the second quarter is due out next Wednesday, and the data are likely to show that the European economy continues to sputter. Real GDP in Europe has accelerated modestly over the past few quarters, but the year-over-year pace is still just 1.2%, and our expectation is for the quarterly growth rate to downshift back down to 0.2% in Q2. If this forecast proves correct, year-over-year growth would still be stuck around 1%,” says Wells Fargo.
Other key data prints are Eurozone unemployment, retail sales, and CPI.
July inflation is forecast to moderate to 1.1% from 1.3% in June and if so this is likely to keep the pressure on the Euro.
Although inflation is traditionally seen as a bugbear for the economy, in the current perennially low-growth environment higher inflation is actually positive for a currency, as it is a sign of stronger growth and therefore more likely to attract foreign investor inflows.
The unemployment rate is forecast to remain unchanged at 7.5% in July when it is released at 10.00 on Wednesday.
Retail sales are forecast to show a 0.3% rise in June compared to May when it declined -0.3% when it is released at 10.00 on Friday.
The U.S. Dollar: Week Ahead Dominated by the Federal Reserve
The most important event for the U.S. Dollar in the week ahead is the Federal Reserve Open Market Committee Meeting (FOMC) at which it will decide whether or not to cut interest rates.
The meeting ends on Wednesday at 18.30 BST when the decision will be published.
This is important for the U.S. Dollar since interest rates can dictate the direction of the currency: the rule-of-thumb for currencies is that when a central bank cuts its interest rate the currency it issues falls.
To be more specific, when a central bank signals it will cut interest rates in the future the currency falls.
Markets are well positioned for a rate cut on Wednesday, therefore the rate cut itself is likely to be market neutral.
What matters is the signal the Fed gives as to future decisions: if the communication suggests more rates are likely than the market expects, then the Dollar will likely fall. If the Fed sounds a more upbeat tone, thereby hinting that it perhaps only one more cut is coming, the Dollar could instead rally.
The market is now a 100% certain the Fed will lower rates by at least 0.25% at the meeting on Wednesday (from 2.5% to 2.25%) and 21.4% that it will reduce rates by 0.50%, according to Fed funds futures pricing.
"A well-priced Fed and renewed expectations for a package of easing by the ECB suggest that the USD is more inclined to find itself on firmer footing," says Mazen Issa, Senior FX Strategist with TD Securities in New York.
On the 'hard' data front, the main data release for the U.S. Dollar is Non-Farm Payrolls in July, which is forecast to show a 170k rise in the number of new workers added when it is released on Friday at 13.30 BST.
Payrolls rebounded strongly in June after a disastrous month in May. They are now expected to settle down to a slightly lower level for the rest of 2019 as the global slowdown in manufacturing weighs.
“Even without a further escalation in the trade war, we expect a sub two-hundred trend for payrolls for the remainder of 2019 as uncertainty weighs on hiring. We expect employers added 170,000 net new jobs in July,” says Wells Fargo in their preview.
A big swing in payrolls could impact the Dollar since hiring is one of the areas of the economy most sensitive to slowdowns.
A poorer-than-expected result would weigh and a better-than-expected result support the Dollar.
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