EUR/USD Week Ahead Forecast: Uptrend to Likely Resume Once Correction Ends
Image © European Central Bank
- EUR/USD to extend higher following a pull-back
- Euro to be moved by GDP data
- U.S. Dollar by Payrolls, FOMC, GDP, and ISM data
The Euro-to-Dollar rate is trading at around 1.1079 at the start of the new week after falling 0.81% in the week before. Studies of the charts continue to show the pair in a short-term uptrend, however, which is favoured to extend albeit through tough resistance which could make progress slow.
The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair pulling back in an ‘abc’ correction after peaking at 1.1179 on October 21.
The correction is quite weak and shallow, suggesting the uptrend will probably take over again soon, pushing the exchange rate back up.
If price retests the 1.1179 highs, or thereabouts, resistance from a larger moving average (see chart below) will probably act as a ceiling limiting further gains and pushing the pair back down in a sideways range, in the short-term.
The daily chart shows more clearly how the 200-day moving average (MA) is acting as a ‘glass ceiling’ preventing further gains.
Only a clear break above the MA, confirmed by a break above 1.1235 would likely see the pair continue up to the next key level, a major trendline situated at 1.1275-1.1325.
The daily chart is used to give us an indication of the outlook for the medium-term, defined as the next week to a month ahead.
The weekly chart shows how the pair has made a stronger rebound during October. This recovery rally (circled) - though still young - is steeper than the previous rebounds and this suggests a greater probability it will extend and could signal a reversal.
That said, there is still a lot of resistance overhead preventing more upside, but assuming the exchange rate can break through it, there is a chance it could still reach the next target at 1.1350, where the 200-week MA is situated - another redoubtable obstacle for bulls to overcome.
The weekly chart is used 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 fundamental drivers of the Euro in the short-term are GDP, inflation and unemployment data, all out on Thursday.
Eurozone GDP is forecast to rise by 0.1% in Q3 compared to Q2, and 1.1% compared to a year ago when it is released at 11.00 BST.
This represents a slower pace than Q2 when growth was 0.2% on a quarterly basis and 1.2% yearly.
“The Eurozone economy has struggled for the past several quarters, something we expect continued in Q3, where we forecast growth of just 0.1% quarter-over-quarter,” says Wells Fargo.
GDP is a key factor in currency evaluation and a higher-than-expected reading should be taken as positive or bullish for the Euro, while a lower-than-expected reading should be taken as negative or bearish for the Euro.
Another key release for the Euro is inflation or CPI data, which is scheduled to be released at the same time as GDP.
CPI is forecast to rise 0.8% in October and core CPI, which leaves out volatile fuel and food components, by 1.0% in October.
Though often characterised as an economic bugbear, in an economy blighted by slow growth, higher inflation is a sign of increased demand and is seen as positive.
A higher-than-expected reading is therefore positive for the Euro and vice versa for a lower-than-expected reading.
Given current low forecasts, the overall trend appears to be for lower inflation which could lead the European central Bank (ECB) to step in with more stimulus - something which is negative for the Euro.
“With economic growth slow and inflation modest, expect further ECB monetary easing in the months ahead,” says Wells Fargo.
The final release of importance for the Euro is Eurozone unemployment, which continues to decline, albeit at a slower pace than before.
Forecasts are currently for unemployment to remain stuck at 7.4% in September, however, a fall to 7.3% might be possible and could help support the Euro marginally.
The U.S. Dollar: What to Watch this Week
On Wednesday Q3 GDP data is forecast to show a slowdown to 1.7% from 2.0% previously, when released at 13.30 GMT.
A lower-than-expected reading will weaken the U.S. Dollar whilst a higher-than-expected reading will strengthen it.
The risks appear to be tilted to lower-than-forecast reading, according to U.S. bank Wells Fargo, which expects a 1.4% result.
“GDP growth likely moderated in Q3 to a 1.4% annualised pace, down from 2.0% in Q2. Last quarter, the consumer saved the day, as personal consumption (PCE) rose at a 4.6% pace and offset a 1.0% decline in business fixed investment (BFI). Businesses were first to pull back spending amidst the trade war, but with no end in sight to the current stalemate, cracks are beginning to materialise in the consumer, the bedrock of the U.S. economy,” says Wells Fargo.
On Wednesday evening at 19.00 BST the Federal Reserve will hold its next policy meeting to decide on where to set interest rates.
The Fed is highly likely to cut the official U.S. interest rate from 2.0% to 1.75% but this is now so widely expected it is already priced into the U.S. Dollar so is unlikely to have an impact.
What is more significant is whether the Fed assesses that the economy is in need of future rate cuts or not. If it does, then the U.S. Dollar could weaken on expectations of future rate cuts since these tend to dampen foreign capital inflows.
Marios Hadjikyriacos, an analyst at FX broker XM.com, is of the view that there is a slight risk the Fed may have shifted to a more hawkish longer-term outlook (meaning in favour of keeping rates higher), which could support the Dollar.
“The market probability for a rate cut next week is 90%,” says Hadjikyriacos. “The Fed has a very strong habit of not disappointing the markets. Now they are going to cut but since that is more or less already priced in the reaction, the reaction of the Dollar will depend mainly on the signals they send for future rate cuts. On that front I do not think they will commit to anything - I think they will keep their cards held close to their chest... But, if anything, it might be a slightly more hawkish message than the markets are expecting.”
Two more major data releases lie at the end of the week, with Non-Farm Payrolls (NFPs) and ISM Manufacturing on Friday.
NFPs are expected to show a 90k rise in payrolls in October, when data is released at 13.30. The data needs to be viewed in the context of a country which is at full-employment.
As important is average earnings, which is forecast to rise at a higher 3.0% from 2.9% previously. Earnings have more impact on growth and inflation and a high figure could push up the Dollar regardless of the headline payrolls number.
October ISM Manufacturing PMI is the other major release and it is forecast to show a recovery to 48.8 from September’s dismal 47.8.
Last month the market fell after ISM Manufacturing and Non-Manufacturing both fell much more steeply than had been expected since these are key metrics for the performance of the economy.
A recovery, therefore, would be seen as ‘saving’ the day, and probably lead to a rebound in the U.S. Dollar.
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