Euro-to-Dollar Rate Week Ahead: Upside Limited as Technical and Economic Headwinds Abound

- EUR falls to April 2017 low on negative charts, weaker economy.

- But technical indicators still bearish, point to new lows for EUR.

- EUR faces key economic data inc January ZEW and PMI surveys.

- USD remains resilient amid strong economy, safe-haven flows.

Image © European Union 2018 - European Parliament, Reproduced Under CC Licensing.

- EUR/USD Spot rate: 1.0829 down 1.04% last week

- Indicative bank rates for transfers: 1.0453-1.0529

- Transfer specialist indicative rates: 1.0670-1.0735 >> Find Out More About This Rate

The Euro-to-Dollar rate fell near to a three-year low last week and with the charts warning of further downside and some important economic figures due out over the coming days, analysts of various stripes are warning the upside will be limited in the week ahead.

Europe's single currency has succumbed to a toxic cocktail of negative technical signals, a weakening economic pulse and an increase in the number of risks lurking in the long grass of the first quarter.

And when combined with the negative effect of European Central Bank (ECB) interest rates, many see the outlook as having turned decidedly bearish. 

The week ahead will see investors confronted with the first notable readings of the Eurozone economic situation in the opening month of the New Year, which will need to be squared with bearish technical signals coming from the charts. 

"EUR/USD remains in free fall and is on course for the 1.0814/78.6% retracement and the 1.0763 2000-2020 uptrend, says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank. "This latter level represents a major band of support, that we look to hold."

Above: Euro-to-Dollar rate shown at 4-hour intervals alongside 2-year German government bond yield (orange line, left axis).

The Euro-to-Dollar rate took another leg down at the beginning of last week as investor risk appetites recovered and the 'carry trade' that sees the Euro sold in favour of higher yielding rivals in pastures further afield appeared to resume. There is, however, a flip side to that carry trade. 

Losses were exacerbated Wednesday by dire industrial production figures, although the gloomy economic mood remained a driver into the weekend following the revelation that Germany's economy stalled in the final quarter. 

"Resistance can now be seen at 1.0879, the October low and 1.0926 the September low and between the November and January lows 1.0981/92," Jones says. "Only above the 1.1054 resistance line will alleviate downside pressure and target the 200 day ma at 1.1114."

Commerzbank's Jones says any rallies to the upside will be likely to terminate between 1.0885 and 1.0925, with the latter being less than a 100 points above Friday's closing level of 1.0829. Although she's not alone in looking for the upside to remain limited.

"Minor intraday resistance at 1.0850 caps EUR upside potential at the moment amid a sustained and deeply entrenched sell off. Loss of support in the upper 1.08s this week leaves the EUR more exposed to sub-1.08 weakness in the short and medium term," says Juan Manuel Herrera, a strategist at Scotiabank. 

Above: Euro-to-Dollar rate shown at daily intervals alongside 2-year German government bond yield (orange line, left axis).

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The Euro: What to Watch

The Euro was the worst performing major currency last week after bearish technical factors conspired with an increasingly bleak continental economic outlook to force Europe's unified unit to fresh multi-year lows against the Pound and Dollar, and there could be only limited respite in store for the week ahead.

Europe's single currency fell to new post-referendum lows against the Pound and ceded more ground to a still-mighty Dollar, with bearish charts egging on a downward lurch that was first incited by bad industrial production data.

And this week could bring only limited, intermittent respite because charts are warning of a new multi-year low being in the pipeline while Tuesday brings the next German ZEW survey and Friday will see IHS Markit release its latest PMI surveys of the long-suffering manufacturing and services sectors. 

"The result may be another leg lower in EUR/USD as market extend their expectations that the ECB will keep rates on hold for longer," says Chris Turner, head of FX strategy at ING. "All in all, we see the balance of risks still tilted to the downside for the euro next week."

Tuesday marks the release of the influential ZEW economic sentiment survey for January, a composite of more than 300 analyst views on current economic situation and the outlook for growth in Europe's largest economy.

Markets are looking for the ZEW barometer to fall from 26.7 to 20.0, before attention shifts to Friday's PMI surveys.

Consensus is looking for only miniscule declines in the manufacturing and services PMI indices this week and likewise with the equivalent barometers for Germany and France, which will scrutinised closely by investors and the Euro. Expectations are for the Eurozone manufacturing PMI to fall from 47.9 to 47.4 at 10:00 Friday, while the services PMI is seen falling from 52.5 to 52.4. 

Germany's manufacturing PMI is seen falling from 45.3 to 44.8 in what would be only a modest movement for even an ordinary month and January was no ordinary month for the global manufacturing sector, which experienced significant disruption in the final week as China's economy went into 'lockdown'.

The German services PMI is seen declining from 54.2 to 53.9 while the equivalent French barometer is expected to rise from 51.0 to 51.4. France's manufacturing PMI is seen falling from 51.1 to 50.8 when the individual country figures are released between 08:15 and 08:30 on Friday.

"While the euro has already fallen to its lowest level in nearly two years against the US dollar, we think that it will drop a bit further during the rest of 2020, pushed down by several factors including a weak economic outlook and looser monetary policy," says Hubert de Barochez at Capital Economics. 

Expectations for the Euro's performance in the year ahead were dented last week by data revealing the German economy stalled on 0% growth in the final quarter, which comes barely more than a week after other figures showed the French and Italian economies contracting into year-end. 

Eurozone growth was just 0.1% in the final quarter as a result of the weak performance from its three largest economies.

They underperformed in spite of a marked de-escalation of the U.S.-China trade war and despite an agreement being struck with the UK that's since provided for an orderly EU exit into a transition period. 

But the rub for Europe's single currency is that this weakness came before China's coronavirus has had chance to show up in any of the economic figures. And given that Europe's economy was wounded more in the trade war than the U.S. and China, it's now expected to be hit hard in the fallout from the virus.

"Business shutdowns in China designed to slow the spread of the epidemic are threatening economic activity in the euro-zone, particularly export-orientated countries like Germany," Barochez says. "What’s more, any remaining hopes that the European Union would make significant progress in strengthening the euro-zone have been dealt a significant blow. On Monday, Annegret Kramp-Karrenbauer resigned from her position of leader of Germany’s Christian Democratic Union (CDU), Chancellor Merkel’s party."

The Chinese economy now faces a sharp contraction in at least the first quarter which could meaningfully reduce 2020 GDP growth even if the coronavirus infection is brought under control within the period.

Coronavirus has turned major cities of many millions of people into ghost towns since early January and although authorities have made repeated attempts to restore production in key industries in some parts of the country, it's not yet clear that they've been succesful and the infection remains far from under control. 

China is a significant trading partner for all economies but it's especially important to the Eurozone and for the global car industry. This in part because Chinese demand represents around 30% of the global market while the big four Eurozone countries have a similarly sized share of supply. 

"EUR/USD has lost ground in seven of the last eight sessions as the already grim economic outlook was hit by a round of unsupportive data and mounting speculation around the negative impact of the coronavirus-related disruptions to supply chains and demand. On top of that, the funding characteristic of the euro prevent it to fully cash in on any recovery in risk sentiment (as we saw this week) and the dollar is showing more and more resilience," says ING's Turner. "In light of this, it won’t be easy for EUR/USD to invert the bear trend for now, and this week may actually make things worse."

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The Dollar: What to Watch 

The Dollar's performance was a chequered one last week but on a Dollar Index basis, the U.S. currency advanced by nearly half a percent amid weakness in Europe and some analysts say that trend can endure through the coming days. 

Investors bid so-called risk assets higher through most of last week resulting in the Dollar ceding ground to the likes of Pound Sterling as well as all the smaller Dollars of Australia, New Zealand and Canada.

However, the antipodean currencies do not feature in the ICE Dollar Index and partly for that reason the benchmark actually gained 0.47% over the last five days, with much of the increase owing itself to losses racked up by European currencies like the Euro, Swiss Franc and Swedish Krona. 

"The DXY has broken above 99.00 this week and we do not see many catalysts warranting an imminent inversion in the dollar resilience," says Chris Turner, head of FX strategy at ING. "Next week, the DXY may be lifted by a few local stories driving some key G10 peers lower."

Lingering concerns over the global economic impact of the coronavirus spreading through China, combined with a robust U.S. economic performance in the New Year is creating a fertile environment for Dollar strength, according to ING's Turner. And with the infection set to linger in the background of the collective consciousness for a while yet, the downside risks could remain quite limited for the U.S. Dollar. 

"The coronavirus story appears to be mutating into some background noise that is preventing any material recovery in risk but equally still not triggering a fully-fledged flight-to-safety. This is translating into breeding ground for the dollar to retain its recent strength as the absence of a slump in rates is pairing with robust domestic data and the notion that the US should be more protected than other economies (the Eurozone, above all)," Turner says.

There is no major economic data due from the U.S. in the week ahead except for minutes of the January Federal Reserve meeting, although the central bank's current stance on monetary policy has been reaffirmed multiple times in recent weeks so the minutes may get only limited airtime on this occasion.

This should leave the Dollar taking its cues from movements in other currencies, which will themselves be driven by their own respective economic figures that are set to be published over the coming days. 

"News on the Covid-19 outbreak will no doubt continue to dominate over the week ahead as investors attempt to assess whether it is being contained or not," says Shane Oliver, chief economist at AMP Capital. "The number of confirmed coronavirus cases (now named Covid-19) in China spiked over the last week, after Hubei province added patients confirmed via clinical tests (CT imaging scans) but who have tested negative via lab tests (ie nucleic acid testing). There are issues with both testing methods." 

China's National Health Commission said at the weekend that as of midnight Saturday it was aware of 57,416 confirmed cases of coronavirus in the country's 31 provinces, with a further 9,419 having been discharged and 1,665 cases having been recorded as deceased. The cumulative total was 68,500.

Saturday's numbers mark a drastic increase on those from the beginning February when the infection was already gathering steam. Confirmed cases were just 14,380 at midnight on February 01 and deaths were just 304.

However, and within this time, the number of cured or otherwise discharged patients has also risen sharply, from 328 to 9,419. Many observe that the spread of the infection appears to have slowed in the last week or more given the growth rate for infections and deaths has been falling. 

But China has last week changed the methodology for diagnosis to incorporate those diagnosed using "clinical diagnosis," leading to several sharp increases in the numbers of new cases disclosed on a daily basis.

The increase and methodology changes coincides with the arrival of World Health Organization staff in China for the first time.