Euro-to-Dollar Week Ahead: Attempting to Break Higher on the Charts after ECB Leans On It

- EUR attempting to break higher on the charts says Commerzbank.

- EUR retains upside bias above 1.0727, is targeting 1.1148, 1.1167.

- German court decision, EU forecasts, U.S.-China tensions in focus.

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- EUR/USD spot at time of writing: 1.0969
- Bank transfer rates (indicative): 1.0513-1.0589
- FX specialist rates (indicative): 1.0731-1.0796 >> More information

The Euro-to-Dollar rate entered the new month on its front foot last week even as the market mood soured again and some technical analysts say it could rise further in the days ahead, although others are wary of a rebound by the Dollar. 

Europe's single currency rose 1.39% last week with much of that gain coming in the latter half after European Central Bank (ECB) suggested it will stand behind 'periphery' bond markets if falling prices and rising yields scupper its efforts to support the financially vulnerable economies of Southern Europe. 

Thursday's policy update drove a fall in Italian bond yields and helped put the Euro on its front foot at the tailend of a month where rocketing 'periphery' bond yields had aggravated concerns about debt sustainability in the Eurozone. 

Euro gains endured Friday even as the six-week recovery in stock markets faltered in response to President Donald Trump threatening to impose tariffs on Chinese goods exports due to its handling of the initial coronavirus outbreak.

Fingers are increasingly being pointed and questions asked of whether China did as much to contain the virus as it should have, potentially setting the stage for a fresh bout of tensions between the world's two largest economies. 

Technical analysts at Commerzbank say price action has left the Euro poised to advance further. 

Above: Euro-to-Dollar rate at daily intervals alongside selected moving averages.

"We look for a challenge to the April 15 high at 1.0994 and 1.1148 the end of March high. A rise above the 61.8% Fibonacci retracement at 1.1167 would be needed for the December high at 1.1240 to be back in play. Near term dips should find that the previous downtrend now offers support at 1.0852," " says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank. "The market will stay bid above the 1.0727 24th April low."

Jones advocated on Friday that clients buy the Euro-to-Dollar rate around 1.0946 and target 1.1148, the March 28 high, and says the single currency will retain an upside bias so long as it holds above 1.0727. However, others are tipping the Euro to lose steam near to its current levels.  

"A cross above 1.10 will prove to be a difficult task as its mid-April peak at 1.0991, the 61.8% Fib retracement of its Mar 27-Apr 24 decline at 1.0997, psychological resistance at 1.10, and its 100DMA at 1.1006 will all conspire to stall the EUR’s rise. Beyond this point, the 200DMA at 1.1035 will stand in its way. The road down is much clearer for the EUR as a move below support at 1.0920/35 could quickly precipitate a decline to the high 1.08s," says Juan Manuel Herrera, a strategist at Scotiabank. 

The Euro will enter the new week with Italy and Spain, two of the continent's most coronavirus affected countries, taking their first tentative steps out of 'lockdown'. They join Germany, Austria and a handful of other countries, with the ocassion marking the beginning of economic recoveries in all those countries. However, much of the global economy remains at a standstill and Eurozone leaders are yet to agree the 'recovery fund' that's supposed to aid weaker member states to get back on their feet.

Above: Euro-to-Dollar rate at weekly intervals alongside Italian 10-year bond yield.

The single currency may also be given a cold shower on Monday when the European Commission releases its latest round of economic forecasts. Then there's the German Constitutional Court ruling on the legality of the ECB quantitative easing programme. The decision is expected some time on Tuesday and if the court finds the programme inconsistent with German law or attempts to complicate the process of ECB QE then it would come as a blow to the Euro.

"The ECB measures announced this week do not go far enough to contain sovereign risks in Europe, in our view, and our rate strategists expect long-end spreads to widen back to pre-PEPP levels over coming weeks. That is likely to register in currency markets as well, but to weigh materially on EUR/USD there has to be some level of spillovers outside of Italy, which was not the case at least in the initial market reaction," says Zach Pandl, global co-head of foreign exchange strategy at Goldman Sachs.

Seasonal flows and the market mood will also be an important influence on price action in the week ahead. Corporate earnings season continues this week and investors will get the April non-farm payrolls report that's expected to show the U.S. unemployment rate rising back toward Great Depression era levels. These could act as a drag on sentiment toward stock markets that were already faltering late last week, although the Euro's response to 'risk-on' and 'risk-off' moods has been inconsistent of late. 

"All G10 currencies broadly underperform through the month. The consistency in the under-performance reveals two findings: a) AUD, NOK and other high beta currencies weaken the most; b) EUR under-performs more than GBP. This pattern of FX performance strongly suggests that May is a risk-off month," says Kamal Sharma, a strategist at BofA Global Research.