The Euro-Dollar Week Ahead: Finding Support on Charts as Fundamentals Set to Dominate

Above: File image of Christine Lagarde. Image © IMF. Image reproduced under CC licensing conditions.

- EUR/USD wounded by U.S. jobs report but finds support.

- 1.1054 support level holds on Friday ahead of key week. 

- Charts favour recovery but fundamentals dominate week.

- UK election, Federal Reserve, ECB all in the mix up ahead.

- U.S.-China tariff decision is due before Sunday December 15. 

The Euro closed last week on the back foot after economic data served the market a reminder of the Transatlantic divergence in economic fortunes, which could weigh on the single currency again in the days ahead even if the charts are still pointing higher. 

Europe's single currency ceded ground to all of its major rivals last week with the only exceptions being the Canadian Dollar and U.S. Dollars, although a blowout nonfarm payrolls report for the month of November did help the greenback retake some previously-lost ground in the noon session Friday and could still have an impact on the exchange rate early in the new week. Especially given the action-packed economic calendar for the days ahead. 

On the positive side, the Euro's Friday sell-off was not severe enough to produce a daily close below the 1.1054 support level, which may remain intact early in the new week and offer the Euro-to-Dollar rate an opportunity to recover early in the new week. However, the Euro will also have to contend with uncertainty around the outcome of the UK general election given its close correlation with Sterling. That looming Thursday ballot will be the single greatest influence on the Pound this week. 

"EUR/USD is poised to challenge the 5 month downtrend at 1.1115. Attention is on the topside and the down trend guards the 1.1180 October high and the 1.1249 channel resistance and eventually the 1.1359 200 week moving-average," says Karen Jones, head of technical analysis at Commerzbank. 

Above: Euro-to-Dollar rate shown at 4-hour intervals. 

Jones, who led Commerzbank's team of technical analysts to the top spot in the 2019 Euromoney FX survey rankings, is betting on an increase in the Euro-to-Dollar rate and is of the view that Europe's single currency should retain an upside bias over both the short as well as long-term.

The battle to clear the 1.1180 resistance on the charts could dominate the next three weeks or so while the next quarter is expected to yield further technical confirmation the Euro has established a long-term 'base' this year.

"Failure at 1.0980 targets the 1.0943 78.6% retracement. This is seen as the last defence for the 1.0879 October low and the 1.0814 Fibo retracement, and if seen, we will look for signs of reversal from here," Jones warns. 

Jones says that overcoming the 1.1359 level, which coincides with the 200-week moving-average of prices, is the "critical break-point" in the medium-term Euro-to-Dollar rate story. If and when this is overcome, the Euro will have a much greater shot at reversing the losses of the 2019 and 2018 years.

However, and on the donwside, a break beneath the 1.1050 support level will open the door to a re-test of the 1.0981 recent low that guards a the more important 1.0814 level that has a rubicon-like quality.

If the Euro sees that latter threshold again, certainly if it sustains a move across it, then markets may draw the conclusion that the multi-year downtrend in the Euro-Dollar rate is not yet over and that further losses could be likely.  

 Above: Euro-to-Dollar rate shown at daily intervals. 

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The Euro: What to Watch  

The Euro closed last week on the back foot after a blowout U.S. non-farm payrolls report and details of a larger-than-expected fall in German production hit the wires Friday and served the market a reminder of divergence in economic fortunes, which is a theme that may endure over coming days. 

Germany's ZEW economic sentiment index is out Tuesday at 10:00, days before the inaugural interest rate decision and policy statement of the European Central Bank (ECB) under new chief Christine Lagarde at 12:45 on Thursday. 

"We expect a modest improvement in the Dec German ZEW Index. A possible Conservative party victory in the UK election and the associated sterling strength may push EUR/USD modestly higher via the GBP/USD flow channel," says Chris Turner, head of FX strategy at ING.

The ZEW survey will provide insight into changes in analyst views of the German and Eurozone economies during the last month while Thursday's ECB meeting could well underline in the eyes of the market the prospect of Eurozone interest rates remaining at negative and deeply unnattractive levels for quite some time to come as the bank seeks to stimulate more economic activity and higher inflation with lower borrowing costs.

That's neither a recipe for gains in the Euro nor one for losses. If anything the emptiness of the economic calendar and prospect of an ECB interest rate statement that simply reiterates Lagarde's already-expressed intention to carry out a strategic review of the bank's monetary policy before taking any action as head of the bank, could simply further entrench expectations of lesser volatility more range-bound trading for the single currency. 

The ZEW survey and ECB statement come after Germany's industrial sector was revealed to have struggled again early in the final quarter, with industrial production falling an annualised 1.7% in October according to Destatis figures released Friday. That deepened a 0.6% contraction from September and came as markets were looking for a 0.1% increase in output. 

"We don’t want to sugar coat these data, but the chart shows that the trend in production growth isn’t getting worse, a message supported by the stabilising trend in new orders, albeit at a very depressed pace. We reckon Q4 will be another write-off for manufacturing before a gradual upturn in H1 next year," says Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics.  

With the European calendar quiet and devoid of any market-moving items on the agenda, the Pound-to-Euro and Euro-to-Dollar rates will be driven largely by events in London and the U.S. over the coming days. 

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The Dollar: What to Watch 

The Dollar closed last week on the front foot after a blowout U.S. non-farm payrolls report sent doubters of the world's largest economy packing during noon trading in the final session of the week, while an action-packed risk-heavy calendar could now keep the Dollar buoyant in the days ahead.

Nonfarm payrolls came in at a staggering 266k for last month, meaning the economy created more than a quarter of a million new jobs in November, while the unemployment rate fell 10 basis points back to a multi-decade low of 3.5%. Those two numbers were enough to light a fire underneath the Dollar even if average hourly earnings growth did disappoint the market at just 0.2%. 

Markets had looked for just 188k new jobs to be created so were blown away by the actual 266k number that emerged and even more so when the estimate for October was revised up from an initial 128k to 156k at the same time. All told, the jobs market has remained in rude health in recent months even in spite of ebbing and flowing tensions between the U.S. and China over the latter's trade practices, and in the face of pessimism about the global economy.

"While it's true that today's payrolls figure was flattered by the return of auto workers who were on strike in the prior month (the impact of which the BLS previously estimated to be 46K direct employees, and something that didn't impact the ADP report), this was still a very strong job gain even accounting for that," says Andrew Granthan, an economist at CIBC Capital Markets, in a note to clients Friday. "This was a strong report almost all the way through.

Economists are right when they often say the labour market is a 'lagging indicator' and that it can frequently be the last thing to warn of trouble ahead when the economy gets dealt a bad hand but even so, the Federal Reserve (Fed) is unlikely to be find cause in any of the recent data for the "material reassessment of the outlook" that Chairman Jerome Powell recently said would be required to change the bank's view of the economy and rates.

Powell has recently said interest rates and the economy are in a "good place". This assertion and Friday's numbers could mean the current 1.75% Federal Funds rate will continue to tower over all other major currency interest rates with the exception of only the Canadian Dollar for some time to come. That might see the Dollar supported and ensure that gains for other currencies are limited until their economies close the performance gap with the U.S.

"Chair Powell should re-emphasise the data-dependent approach of the committee. With Nov US CPI inflation to print 2%YoY (Wed) and Nov retail sales (Fri) rising, the case for no urgent rate cuts should remain in place. Also, today’s labour market data further supported the notion of stability in interest rates for now," says ING's Turner.

The Federal Reserve will announce its next interest rate decision at 1900 Wednesday while November's inflation figures are due out at 1330 on Wednesday. U.S. inflation rose from 1.7% to 1.8% last month, leaving it nestled just below the Fed's 2% target and it might take a sharp fall for the November month in order to wobble the Dollar this week, although the market is looking for that number to rise from 1.8% to 2% for that month. 

Furthermore, and with the U.S. decision on whether to go ahead with further tariffs on imports from China also looming throughout this week, the Dollar may also find itself supported with a safe-haven-seeking bid to the detriment of riskier currencies like the Aussie and New Zealand Dollars.  

President Donald Trump said on October 11 "we’ve come to a very substantial phase one deal" but since then he's increasingly said only that such a thing "could be reached". 

If there was ever an agreement struck back then there certainly wasn't at the close on Friday and December 15 still marks the date on which tariffs are due to be imposed on all of China's remaining annual exports to the U.S.  

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