Euro-Dollar Week Ahead Forecast: Vulnerable as ECB, Virus and U.S. Election Debate Dominate 

-EUR/USD caught in retreating tide after break below 1.17.
-Resistance stymies rallies at 1.1750 amid USD rebound.
-ECB speeches, U.S. election debate, coronavirus in focus. 

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• EUR/USD spot rate at time of writing: 1.1630
• Bank transfer rate (indicative guide): 1.1234-1.1315
• FX specialist providers (indicative guide): 1.1466-1.1536
• More information on FX specialist rates here

The Euro-to-Dollar exchange rate closed its worst week since April on Friday but risks being carried lower still as the first U.S. election debate, a resurgent coronavirus and two European Central Bank (ECB) speeches test investors’ confidence in earlier wagers on the single currency 

The Euro fell while the Dollar recovered sharply last week as investor risk appetite faltered, leading to declines for stock markets and the single currency but with multiple contributors to the sell-off including U.S.-China tensions, an ongoing absence of U.S. financial support for households and ambiguity about whether the Federal Reserve (Fed) will honour its recent commitment to keep interest rates at zero for a period even after inflation rises above the 2% target. 

Other factors weighing on the Euro included rising concerns about coronavirus containment in Euro, signs that Eurozone recovery expectations have topped out and damaged confidence in the single currency’s ability to deliver further returns after the ECB complained about its strength earlier in September. 

Monday and Wednesday speeches from Christine Lagarde mean currency concerns will be immediately relevant this week.

"The EUR Effective Exchange rate (ECB) is weighing heavily on the lower end of its two-month range at 101.30. A close below here will see a small top complete to warn of a more meaningful correction within the broader uptrend for a decline to a cluster of supports at 100.43/12, where we would then look for a fresh floor. Such a move would clearly also help reinforce our bias for a lower EURUSD and EURJPY," says David Sneddon, head of technical analysis at Credit Suisse. "EURUSD maintains its top below 1.1697 and although the decline has lost a little momentum near term, we continue to look for a more significant move lower and a fall to a cluster of supports at 1.1495/85."

Above: Euro-to-Dollar rate shown at hourly intervals alongside S&P 500 (green line, left axis).

September’s losses for EUR/USD have left behind in their wake, a damaged technical backdrop on the charts, although the decline lost some of its momentum toward the weekend and Credit Suisse’s Sneddon has warned that “a near -term bounce should be allowed for, but with this viewed as temporary.”

Others also have increasingly bearish views on the single currency.

“EUR/USD remains under pressure and we would allow for further losses to 1.1523, the 38.2% retracement and there is potential for the March high at 1.1495. There is an outside chance that losses could extend to the 200 day ma at 1.1236, but that would be the maximum downside that we would expect,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, who's a seller of EUR/USD. “Rallies will find initial resistance now offered by the 55 day ma at 1.1750.”

"The euro was well supported in the 1.17s as the market had bought it there five times, steering off a larger decline. Price action has broken through this triggering long stops and shaking out new long positions. While there is room for the BBDXY to rise we still think there is room for euro to decline to the 1.15s, possibly 1.1350," says Paul Ciana, chief technical strategist at BofA Global Research.

President Christine Lagarde will deliver a statement to the ECON committee of the European Parliament at 14:45 Monday and the Euro is likely to listen keenly given she has at times sounded less concerned about recent gains in exchange rates than the ECB's chief economist and other policymakers. 

Upward pressure on Europe’s single currency has actually eased in recent weeks although it’s not clear if this will be acknowledged by Lagarde, or if instead she’ll seek to counter the perception that she’s less concerned about exchange rate strength than some of her colleagues. 

“The ECB event could also see more reference to vigilance over the strong EUR. Wednesday looks like it will be a busy day," says Chris Turner, global head of markets and regional head of research at ING. “Speculative long EUR positions remain at risk during the current test of market confidence, but we suspect good demand will be found in EUR/USD near 1.16.”

Above: Euro-to-Dollar rate shown at daily intervals alongside S&P 500 (green line, left axis).

Any renewed complaint about currency strength could be a headwind for the Euro early on this week, and would do little to ease nerves among investors who bought into the May-to-September rally.

Some of those investors have already evidently cash out and walked away, although the danger is that a record 'net long' institutional investor position is unwound further in the coming weeks now the ECB has suggested it's not comfortable at 1.20 or above, while other risks are looming on the horizon.

“The path of least resistance in EURUSD is still probably lower," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. ”If the EUR long positions held by leveraged funds are in the process of being cleansed, picking the end point of that process in spot EURUSD terms is largely a judgment call. Leveraged funds flipped from a net short position to a net long position in EURUSD at the end of July. Based on where EUR longs held by leveraged funds were as of last week (67K contracts) and the June/July average (54K), it's reasonable to assume that positioning in EURUSD would be back to about neutral in the 1.1450/1.1500 range - all other things equal.”

The trajectory of U.S. stocks and the impact that Wednesday’s election debate has on them will also be key influences on the single currency. 

The Euro has a positive correlation with U.S. stocks and the Dollar a negative one. Both will be in the firing line in the early hours of Wednesday morning when the first of several televised debates will pit President Donald Trump against Joe Biden of the Democratic Party ahead of the November 03 election. 

Biden enters the debate with a healthy lead over the incumbent among pollsters, but his policy platform entails higher government spending and more onerous regulation. The Euro and positively correlated Chinese Yuan have risen along with his standing in the polls so might be at risk from any missteps by the gaffe-prone candidate, although there are also risks in a better-than-expected performance too if such a thing happens to undermine stock markets. The next debate will not be until mid-October.

"Western Europe continues to be led by France and Spain, though the latest data from Madrid are encouraging, showing new positive tests and peaking and ICU admissions falling in the past few days. These, however, are not yet conclusive," says Ian Shepherdson, chief economist at Pantheon Macroeconomics. "U.K. cases have surged at an exponential rate in recent days, and are now above the spring peak. Daily hospitalizations are running at only about one-sixth of the spring peak, but are rising steadily."

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

Europe’s single currency will also have to contend this week with rising numbers of coronavirus infections and the risk that these lead to renewed draconian restrictions on activity and freedom of movement in larger parts of Europe. The UK government has already ordered hospitality venues to close early from 22:00 while Spanish authorities have imposed restrictions in Madrid and France has also threatened a return of more draconian measures. 

Any return to ‘lockdown’ or other meaningful disruption of life would place a question mark over the economic outlook and consensus idea that Europe’s economy will outperform the U.S. over the coming year, which is a key pillar underpinning the earlier bullish market view of the Euro.

“European growth risks should not be exaggerated: the surge in COVID cases and accompanying drop in regional PMIs were two big factors in pushing European growth expectations lower last week. I have no doubt these factors matter, but I don’t think they matter as much as markets seem to think. Take the COVID surge. While Europe’s 2nd wave has removed an important positive for the region, case counts are less important than government restrictions and population mobility. On both counts, the impact of the 2nd case wave has been tiny relative to what happened last spring. This may change, but the headlines are surely worse than the current reality,” says James McCormick, global head of desk strategy at Natwest Markets.

Once beyond the U.S. election debate, and with virus concerns aside, the Euro is likely to scrutinise Friday’s 10:00 release of inflation figures by Eurostat, given that inflation fell to -0.2% in August.

Consensus is looking for an increase to -0.1% for September, with the more important core-inflation number seen rising from 0.4% to 0.5%.

ECB policymakers have for years been unable to meet the “below, but close to 2%” inflation target owing to structural weaknesses in the bloc’s economy, which is a part of why the bank is concerned about strength in the Euro-to-Dollar rate. A rising currency incentivises economy-eating imports by making them cheaper to buy and, in the process, can reduce inflation by cutting the prices paid by consumers at the shelves in supermarkets and elsewhere.