Euro-Dollar Week Ahead Forecast: Charts Warn of Further Sell-off ahead of ECB, PMI Data

- EUR/USD technical outlook conflicted ahead of key data.

- Deeper sell-off can't be ruled out this week, analyst says.

- EUR to be teste by ECB decision and IHS PMIs this week.

- USD eyes global data amid quiet U.S. economic calendar. 

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The Euro ceded ground to the Dollar and underperformed many major rivals last week and the charts suggest a further sell-off cannot be ruled out for the days ahead, which will also see the single currency tested by European Central Bank (ECB) rhetoric and IHS Markit PMI surveys.

Europe's single currency closed 0.26% lower against the Dollar for the week on Friday, with the Euro-to-Dollar rate influenced to the downside at the last minute as U.S.-EU trade tensions landed back on the market's radar. But the Euro had already come under pressure from strong U.S. retail sales that prompted investors to reappraise the short-term outlook for the world's largest economy.

Any hawkish rhetoric from the ECB or upside surprises in Friday's PMI surveys might be enough to support the single currency from further declines. 

The exchange rate has failed to retain the upward momentum it had heading into year end and has now carved out a series of lower highs, and lower-lows on the charts. This has left it at risk of drifting lower still this week, although economic data will have the final word on the trajectory of the currency.

"EUR/USD can ease slightly over the week against a firmer USD," says Joseph Capurso, strategist at Commonwealth Bank of Australia. "USD is likely to remain firm after last week’s stronger than expected U.S. December retail sales report and housing starts confirmed the outlook for the US economy is good."

"EUR/USD fell to 1-week low and below its key support at 1.1100," says Quek Ser Leang, a foreign exchange strategist at UOB in Singapore. "Downward momentum has picked up considerably and the risk for today is still on the downside. That said, any weakness is expected to encounter solid support at 1.1065. Only a move above 1.1115 would indicate the current weakness in EUR has stabilised."

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

"The intraday Elliott wave counts are contradictory and we remain unable to rule out scope for a deeper sell off to the 100 day ma and uptrend at 1.1068/64. Overhead the market is facing tough resistance at 1.1190-1.1240 – namely the 55 week ma, the 2019-2020 down channel and the recent high," says Axel Rudolph, a senior technical analyst at Commerzbank.

Rudolph says the 1.1240 level is the last impediment to a return by the Euro to its 200-week moving average that's located around 1.1359.

However, he's also warned that failure to hold the 1.1068 level would open the door to a further slide by the Euro-to-Dollar rate down to 1.0981, which has not been seen since the early days of December.

Rudolph and the Commerzbank team are looking for the Euro to spend the next three weeks attempting to overcome the 1.1215 level, with a view to positioning for a further climb up to the 1.1359 threshold. 

"Long term trend (1-3 months): The reversal from the base of a one year channel implies that the currency pair has based. Above the 200 week ma will target 1.1570 the 2019 high," Rudolph writes in a note to clients Friday morning..

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

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The Euro: What to Watch

The Euro ceded ground to most major rivals last week amid an improvement in investor appetite for riskier assets and as U.S.-EU trade tensions appeared back on the market’s radar, although economic data and the European Central Bank will drive price action in the single currency this week. 

Thursday at 12:45 will mark the release of the latest ECB interest rate decision and although all of the bank’s interest rates and various policy initiatives are expected to go unchanged, markets will still scrutinise details of the statement and press conference closely for clues on the outlook. 

“ A lot of attention will be given to the ECB meeting with Christine Lagarde laying out the details of the policy framework review. However, while we see this as an important theme for the markets this year, we probably won’t get enough clarity next week to drive the markets. Some increased optimism though from the ECB given improved data may help support the euro,” says Derek Halpenny,  head of research, global markets EMEA and international securities at MUFG.

Former International Monetary Fund chief Christine Lagarde now heads the ECB and has made a strategic review of the bank’s current policy stance the first item on her agenda. 

This is expected to take months and could mean that Thursday’s policy event lacks market-moving information, which would leave investors looking to Friday’s PMI surveys for clues on the Euro outlook. 

“Eurozone long term yields bottomed out in late Q3 last year, as the US and China stepped back from further trade war escalation. The following reduction in the chances of serious Eurozone recession has tampered expectations of further ECB easing, and allowed the euro to rally modestly,” says Ranko Berich, head of market analysis at Monex Europe. 

December’s IHS Markit PMI numbers were revised higher for the Eurozone manufacturing and services industries earlier this month, although the manufacturing industry remains mired in a contraction much like its counterparts across the developed world. 

This has boosted sentiment towards the Euro but means Friday’s ‘flash’ numbers for January will be watched closely by the market. Any disappointments will weigh on the single currency while upside surprises would likely draw a bid from the market. 

Consensus is looking for the manufacturing PMI to rise from 46.3 to 46.9 while the services PMI is seen rising from 52.8 to 52.9. It’s possible the manufacturing PMI for Germany, which is seen rising from 43.7 to 44.6 when the number is released at 08:30 Friday, will garner more attention from the market than the Eurozone numbers that are set for release at 10:00 on the same day. 

“The “flash” January PMI release will provide an early indication of EA growth momentum in Q1 20. Business sentiment in December was mixed with the services sector remaining resilient into year-end amid persistent manufacturing gloom. We expect EA manufacturing sentiment to get some support from an improving global trade backdrop, while services sentiment should remain at healthy levels,” says Iaroslav Shelepko, an economist at Barclays. 

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The Dollar: What to Watch

The Dollar closed Friday as the second best performing major currency of the week although the calendar is devoid of market-moving economic figures for the coming days so the traders, the greenback and other currrencies will likely take their cues from an action-packed non-U.S. data calendar for the week ahead.

Investors bid for the Dollar last week after inflation was seen remaining above the 2% target of the Federal Reserve in December and following upside surprises for year-end retail sales figures that have checked the market's pessimism about the U.S. economic outlook. Market speculation was further encouraged by the signing of the long-elusive 'phase one deal' to suspend hostilities between the U.S. and China. 

"The “Phase 1” deal signed in Washington is a mixed bag. If implemented in full, the deal will broaden access to China’s market for US firms and level the playing field for them. But it fails to address long-standing US grievances about state subsidies, and, crucially, lacks a clear and effective enforcement mechanism," says Eleanor Olcott, a China policy analyst at TS Lombard. "For investors, the chapters on currency stability and the expansion of bilateral trade are the most important for assessing the deal’s short-term durability since any non-compliance on these will be evident immediately."

Total retail sales rose by a respectable 0.3% in December, although that particular number was unchanged from the prior month and was also well anticipated by the consensus. Core retail sales on the other hand, rose by a sharp 0.7%, up from 0.1% in November and ahead of the 0.5% consensus.

The big move in December’s core number explains the big turnaround in the Dollar, which had ceded ground to many other majors ahead of the release but was quoted higher relative to all except the Pound and Kiwi in the wake of it. Core retail numbers are given more attention by the market because they exclude car sales from the data due to the distorting impact their large price tags can have on underlying trends.

"If the dollar is in for a turn south, the move could be significant. However, fast-money consensus, eager to sell dollars, currently have to cope with rising US growth expectations vs developed markets," says Martin Enlund, chief FX strategist at Nordea Markets. 

Consumer prices rose 0.2% in December, according to the Bureau of Labor Statistics, when markets were looking for a 0.3% increase. The miss was enough to briefly wobble the Dollar even though the annualised rate of inflation still ticked higher from 2.1% to 2.3%, in line with expectations. Core inflation rose 0.1%, below the 0.2% consensus although the annualised rate still held steady at 2.3%. Core prices are seen as a more reliable measure of domestically generated inflation trends.

"USD could squeeze out some gains into the Jan FOMC but the broader 2020 story is cautious as green shoots in China and EZ take hold and US election uncertainty builds," says Sean Callow, a strategist at Westpac. "EUR/USD has rebounded off support within a 1.09-1.14 range. Improved background policies and a turn in industrial activity could underpin a period of EUR gains." 

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