The Euro-to-Dollar Week Ahead: Testing Major Level on Charts as Fundamental Headwinds Mount

Modified: Sunday, 23 February 2020 17:47 GMT
Written by: James Skinner

- EUR/USD steadies on Friday but risks further losses this week.

- Charts place EUR on a collision course with a 20-year trendline.

- If 1.0750 gives way, charts suggest EUR could head toward 1.04.

- Divergent U.S.-EU paths, fragile risk appetites, to weigh on EUR.

- Ifo survey out in Europe; confidence, core durables, PCE in U.S.

- EUR/USD Spot rate: 1.0848 up +0.08% last week

- Indicative bank rates for transfers: 1.0504-1.0580

- Transfer specialist indicative rates: 1.0722-1.0787 >> Find Out More About This Rate

The Euro-to-Dollar rate was little changed last week but it's tipped by technical analysts to test a major 20-year trendline over the coming days just as fundamental headwinds are beginning to mount again for the single currency.

Europe's single currency bounced Friday in response to IHS Markit PMI surveys that at least appeared to suggest the economic outlook isn't quite as downbeat as many had feared, although the data could be misleading. And a last minute retreat by the Dollar helped the Euro higher into the Friday close after PMI surveys of the U.S. manufacturing and services sectors surprised on the downside for February.

However, and despite Friday's price action, the Euro still faces a multitude of technical and fundamental headwinds that could easily see the Euro-to-Dollar rate under fresh pressure again in the week ahead. And if any such pressure prompts a decisive close beneath a key support level near to the current market price, the two-decades-long uptrend in the Euro will then have been broken. That would be a strong signal of more losses ahead.

"EUR/USD is heading towards the 1.0763 2000-2020 uptrend. This is key support and we look for it to hold the downside and provoke reversal. So far there is no sign of a bounce," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank. "Near term rallies will need to regain 1.0879 (the October low) as an absolute minimum in order to alleviate immediate downside pressure."

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

Jones says that if the Euro is able to overcome the 1.0879 level it will then have to find restistance at the 1.0926 and 1.0981 thresholds. She advocated last week that clients buy the Euro around 1.0785 and is looking for the support line at 1.0763 to be tested but remain intact over the coming weeks and months.

Others agree there's currently no sign of a bounce in the Euro-to-Dollar rate but are nonetheless mindful that it could be forming a long-term base on the charts.

"The EUR continues to show signs of stabilizing around the 1.0800 mark following a sharp slide during the first half of February; technical signals still indicate, however, that the common currency remains in oversold territory," says Juan Manuel Herrera, a strategist at Scotiabank. "For the moment, price action does not point to a rebound in the EUR, so we maintain a cautious stance around calling this a bottom rather than a bump in the road toward the 1.0500 level. Support is at 1.0775/80 followed by 1.0750 with resistance at ~1.0820."

The Euro has been sold heavily so far this year and the resulting losses have sene it break to the downside from what was a narrow multi-month range against the Dollar, taking out a number of other technical support levels in the process. And although the exchange rate showed signs of stabilisation on Friday it's now perched precariously on a two-decade-old trendline on the charts and if something were to push the currency decisively below that level, further noteworthy losses would be likely.

"EUR/USD is currently trading just above important technical support at 1.0750 which is where the trendline joining the lows from October 2000 and December 2016 is located," says Lee Hardman, a currency analyst at MUFG. "A decisive break below would open the door to another leg lower for the EUR towards the lows put in place back in late 2016/ early 2017 between 1.0400 and 1.0500."

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

The Euro: What to Watch

The Euro rose against a majority of major rivals last week, aided at the last minute by better than anticipated PMI data and a Friday retreat by the Dollar, although some strategists say the recent bounce by could draw fresh sellers from the woodwork in the week ahead.

Europe’s single currency scored its second consecutive gain Friday after IHS Markit surveys stoked potentially misplaced optimism about the outlook and as the Dollar retreated from earlier highs, although few analysts see the nascent bounce off multi-year lows as having legs to go much further.

“Similar to what we saw earlier this week, a German survey may ignite the downtrend in EUR/USD,” says ING’s Turner. “The EUR still appears in an unpleasant position: the economic outlook for the eurozone keeps worsening and its funding characteristics still prevent it from taking full advantage of rebounding risk sentiment. When adding that the dollar may continue its bull run or at least remain relatively supported, we look for some downside towards 1.07 in EUR/USD next week.”

The economic data calendar also falls relatively quiet with this week being devoid of any major data points, although markets will scrutinise Monday’s German Ifo Business Climate index reading closely for clues on the current condition of the Eurozone economy.

Consensus is for the Ifo index to dip slightly from 95.9 to 95.0 for February when it’s released at 09:00 London time Monday, although ING’s Turner says that a disappointment would push the Euro-to-Dollar rate beneath the 1.08 threshold in a decisive way, potentially exposing it to a deeper decline.

“The big unwinds in long EURUSD are yet to be fully done. More news of shutdowns/virus cases over the weekend would likely put us back on the path to a grind higher in USD pairs in G10,” says Jordan Rochester, a strategist at Nomura.

Markets will use the Ifo survey to gauge the likely pace at which the continent’s economy is slowing and they’ll also be looking for signs of a coronavirus impact on activity. Europe’s factory sector has deep links with the Chinese sector that’s shut its doors as authorities attempt to contain the coronavirus.

Europe was hurt more in the U.S.-China trade war than either of the two protagonists and with the world’s second largest economy now having come close to a standstill as a result of the virus spreading there, investors and analysts are increasingly anticipating a knock-on growth hit to Europe.

“Data from China is traditionally patchy over New Year, and the virus is expected to lengthen this process. It may take until June for accurate data to be released. China’s economy has been running at 40-50% capacity over the last week. Capacity utilisation at major Chinese ports has been 20-50%, and storage warehouses are nearly full,” says Geordie Wilkes, head of research at Sucden Financial.

A further Eurozone slowdown would risk widening the differential between GDP growth in Europe and the pace of expansion in the U.S., which has been a key driver of the Euro-to-Dollar rate in recent years. And for this reason the Euro will also be responsive in the week ahead to coronavirus headlines, especially as the U.S. economy and Dollar are thought to be less exposed to a Chinese slowdown.

South Korea, Japan and Italy reported small clusters of coronavirus cases last week, stoking fears that the outbreak of the deadly pneumonia like disease could drag on for longer than was initially envisaged by investors and do more economic damage. And South Korea raised the alert level to its highest at the weekend after the number of infections surged from 204 on Friday to more than 600 Saturday, while Italy has quarantined villages and towns in the north after it discovered a total of 130 cases - up from single digit numbers on Friday.

The virus and the efforts to contain it are already having an observable impact on the Chinese and global economies with car sales in China, the world’s largest market for cars, falling more than 90% in February according to figures released last week. Many Chinese citizens remained in self isolation this month, while those who weren’t simply kept away from the shops. And it won’t be long before such declines in activity are felt beyond the borders of China.

The Dollar: What to Watch

The Dollar fared well against most rival currencies last week, remaining the top performer for 2020 and is tipped by multiple analysts to advance again this week as the U.S. economy continues to demonstrate its exceptionalist credentials while benefiting from an apparently lesser exposure to the Chinese economy.

Major U.S. economic figures will be few and far between in the week ahead although investors will take heed of Tuesday's Conference Board consumer confidence number, Thursday's core durable goods orders figures and Friday's core PCE price index. Investors will be attempting to assess what impact the coronavirus has had on household confidence and business investment because both are important pillars of the economy.

"The stalling of supply chains amidst the spread of COVID-19 likely thwarted orders in February, adding to the industrial sector’s challenges stemming from the halting of production of a major aircraft. That should leave business investment as subtracting from growth in Q1," says Katherine Judge, an economist at CIBC Capital Markets. "consumer confi dence could undershoot expectations early in the week, but income growth may have beaten expectations to start 2020. Core PCE infl ation likely moved a tick closer to the 2% target, although we aren’t as convinced as the Fed seems to be that this trend will continue past the current quarter."

The U.S. economy grew at a steady 2.1% pace in the final quarter last year while most other major economies slowed and so far in 2020, it looks as if that trend continued early in the New Year. Such economic exceptionalism is making interest rate cuts from the Federal Reserve even less likely than they were previously and entrenching the Dollar's yield advantage over rivals and buoying the U.S. currency.

Minutes of the January Federal Reserve (Fed) meeting showed on Wednesday the bank sticking to its well-worn script which dictates that a “material change” in the outlook for the domestic economy is necessary in order to force a change of its on-hold rate stance.

"Congestion data from Beijing, Shanghai and Guangzhou suggest that traffic is down 75% or so versus averages still. In other words, China is still effectively closed down, even in the regions that have so far not been (officially) hit severely by the virus," says Andreas Steno Larsen, a strategist at Nordea Markets. "Our main market take-away is that the US outperformance narrative will likely stay intact, since e.g. Germany is relatively worse off than the US due to the Chinese closedown. This also leaves us in the upper part of the USD smile during Q1 and into Q2. USD stronger for longer."

The Dollar has also been benefiting from safe-haven flows fleeing riskier assets in response to uncertainties thrown up by the coronavirus that's already hobbled China's economy and is now threatening South Korea and Japan. And when combined with recent U.S. economic outperformance and underperformance from elsewhere, the Dollar is beginning to appear unassailable.

And those safe-haven flows are expected to continue supporting the greenback in the week ahead, encouraged by the fact the elatively 'closed' domestic U.S. economy is thought to be more insulated than other large economies from any global slowdown that might materialise as economic damage is exported from China to other parts of the world.

"Investment flows continue to pour into US assets such as equities and bonds. We highlight EUR and JPY weakness as a key driver of broad-based USD strength, with USD/JPY standing out after a recent series of bullish long-term trend reversals. This has allowed the DXY to approach the 100.00 threshold – with a key resistance hurdle at 100.30 now within sight," says George Davis, chief technical strategis at RBC Capital Markets.