Euro-Dollar Week Ahead Forecast: Steadying after Correction Fizzles, but Vulnerability Lingers

- EUR/USD recovers footing after correction runs course on charts.
- But faces shaky markets, vaccine delays & economy fears ahead.
- Upside limited in short-term, with 1.20-to-1.2350 range prevailing.

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• EUR/USD spot rate at time of writing: 1.2160
• Bank transfer rate (indicative guide): 1.1665-1.1760
• FX specialist providers (indicative guide): 1.1947-1.2009
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The Euro-to-Dollar exchange rate was an outperformer last week but with an earlier correction having ran its course, technical analysts see scope for the Euro to rise further in the coming days, although shaky global markets and homegrown economic risks mean it remains vulnerable to periodic setbacks. 

Europe's exchange rates were all higher ahead of the weekend, leading the Euro to turn from a laggard to an outperformer among major currencies after January's IHS Markit PMI surveys suggested the continent's manufacturing and services sectors held up better than was expected this month. 

Many continental companies and households spent this month in a renewed state of 'lockdown' although the resulting declines in purchasing manager surveys were much less than those seen over in the UK. PMI surveys enabled the Euro to build on momentum kicked up when European Central Bank (ECB) President Christine Lagarde said on Thursday that it may not be necessary for the bank to use all of the new money allocated to its pandemic-inspired quantitative easing program.

Lagarde's remarks were perceived by some observers to be less 'dovish' than was expected, although the ECB chief will have opportunity to provide clarity on the kinds of circumstances in which the bank might not use all of the €1.85 trillion it has allocated, as well as to make fresh remarks about Eurozone exchange rates during Monday speeches to the Institute for Law and Finance and then an online Davos World Economic Forum. The speeches are scheduled for 08:45 and 16:15 respectively.

"The EUR is now more clearly forming a bullish reversal from mid-month as it forms a solid upward trend since Wednesday’s cross below 1.21 that is putting it on track to test the 1.22 level," says Juan Manuel Herrera, a strategist at Scotiabank. "The 1.22 mark acts practically as the mid-point of the EUR’s Jan 7-18 drop and a cross above the mark may see the EUR briefly slow its climb around 1.2225; 1.2236 is the 61.8% Fib retracement of the decline." 

Above: Euro-to-Dollar rate shown at hourly intervals alongside S&P 500 futures (orange). 

Thursday and Friday's gains for the Euro came against a backdrop of widespread declines for stock markets and other risk assets that the single currency normally enjoys a positive correlation with, and were more notable for having given technical analysts the impression that an earlier downward correction may now have run its course. 

"EUR/USD has bounced off the 55 day ma at 1.2081. It is possible that this was an ‘a-b-c’ correction lower that has completed and we will have to neutralise, as it is possible that the markets next move will be on the topside," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank. "Medium-term the market continues to track higher whilst targeting the 1.2556 2018 high and 1.2624, the 200 month moving average, which remains our longer term target." 

The Euro had traded as high as 1.2350 earlier in January and could now seek to reclaim this level before moving on to bigger and better levels, although while doing this, the single currency will also have to contend with shaky global markets and the shadow cast over the Eurozone economic outlook by delays in Europe's vaccine rollout. 

An undisclosed manufacturing issue has led Astrazeneca to warn that vaccine deliveries to European countries will be substantially less than agreed over the coming months, which is threatening to scupper the bloc in its amibition to have 70% of all European adults vaccinated by the end of September. Politico reported at the weekend that at the rates achieved last week Europe would have only 15% of the adult population inoculated by then, meaning that vaccinations need to be increased five-fold to meet target. 

Above: Euro-to-Dollar rate shown at daily intervals alongside S&P 500 futures (orange). 

Any protracted delays would risk seeing Europe's economy mired in 'lockdown' for longer than might otherwise have been the case and at a time when government's financial support for their economies is said to be lessening prematurely. Any premature tightening of the purse strings at national treasuries would risk even greater economic harm.

"The roll-out of the vaccination of the population has fallen well behind that of the US and UK for reasons I can’t detect. Meanwhile, European fiscal authorities seem strangely satisfied with their present policy setting which will see the fiscal stimulus being cut measurably throughout Europe this year compared to last year, even though we may still be almost two years away from restoring pre-pandemic GDP levels," says Erik Nielsen, group chief economist at UniCredit Bank. "On present numbers, every single European country is set for withdrawal of fiscal stimulus this year by 1-4pp of GDP, measured as the change in the structural primary balance. Seriously, if not adjusted, this will put a problematic question mark on the recovery after the first automatic, or technical, rebound, and it’ll put longer-term potential growth at risk." 

On the economic front and in light of the message given off by last week's PMI surveys for January, the Euro could pay close attention to Monday's influential Ifo survey that measures business conditions in Germany and the Eurozone, which is out at 09:00. They may also scrutinise preliminary GDP data for the final quarter from France, Spain and Germany, which is due out Friday morning and will provide an initial estimate of the damage done by year-end and New Year 'lockdown' across the bloc. 

Above: Euro-to-Dollar rate shown at daily intervals alongside S&P 500 futures (orange). 

"Getting that package through in its entirety is hardly guaranteed – legislative math is still difficult," says Kevin Cummins, chief U.S. economist at Natwest Markets. "Either way, we see mid-March as a soft deadline at which the Biden administration will aim to pass this initial stimulus bill. We have penciled in $1-$1.5tn as a loose estimate of what gets done over the first half of 2021 (with mid-March as the clearest “soft” deadline), though see risks on both sides of that amount. The focus on the Covid-19 stimulus package will likely push other issues, such as international trade, to the back burner for now."

The other prominent influence on the Euro in the week ahead will be investors' sentiments toward the Dollar and appetite for risk assets like stocks and commodities, which will be determined in part by the evolving prospects for President Joe Biden's  $1.9 trillion stimulus bill making it through Congress. He needs to persuade 10 Republican senators to back his bill for it to become law, which leaves him vulnerable to Republican demands over its size.

The Senate is not expected to take up the bill until February although markets will be sensitive to remarks from key lawmakers, with any indications that a substantial reduction in size is in the pipeline likely being met by weakness in stock markets and gains for the U.S. Dollar. Wednesday's U.S. GDP data and Federal Reserve policy decision will also be watched closely by investors, although some analysts say the GDP data should have little impact on the Dollar and that the Fed is a risk to greenback.

"For the week ahead, we’ll be looking to see what impact broadening lockdowns are having on the continent and whether ECB President Christine Lagarde and Chief Economist Philip Lane will try to address the modest sell-off in eurozone debt markets with more dovish commentary – they speak on Monday and Wednesday, respectively," says Petr Krpata, chief EMEA strategist for currencies and interest rates at ING. "On balance, we continue to see EUR/USD trading in a 1.20-1.23/25 trading range this quarter and then making a push higher when economies reopen in the second quarter."

Above: EUR/USD and other major euro exchange rates shown at monthly intervals. Click image for closer inspection.