Euro-Dollar Week Ahead Forecast: Back on Feet but Vulnerability Lingers

- EUR/USD steady after narrow escape from new lows
- But vulnerability lingers as Fed taper, U.S. data eyed
- USD & global factors dominate in quiet week for EZ

Image © European Central Bank

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• Spot: 1.1788
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The Euro-to-Dollar rate entered the new week near to 1.18 after narrowly escaping new 2021 lows but may struggle to get up further momentum over the coming days and will also be among the most vulnerable currencies to any recovery by the greenback.

Europe’s single currency was a prominent beneficiary of a widespread retreat by the Dollar that helped lift the Euro from 2021 lows near the round number of 1.1700 last Wednesday to just a fraction below 1.18 by Monday.

The Euro was handicapped from early on last week with market concerns about the coronavirus situation in Asia growing and after the latest ZEW survey warned of a sharp deterioration in business sentiment about the outlook for Europe’s largest economy through Autumn.

But it was the greenback’s mid-week offensive that had the Euro-Dollar rate on the cusp of slipping beneath the somewhat psychologically important 1.17 level before July’s U.S. inflation data hinted of a possible peak for American inflation being in the pipeline.

“We are not convinced that EURUSD's bounce from 1.17 support is durable, especially as the real rate divergence between US and Germany persists, and is likely to get wider into the fall,” says Mazen Issa, a senior FX strategist at TD Securities.

“At this point, the taper is a foregone conclusion. It's just a question of when, not if. Given the hawkish rhetoric from Fed officials recently, the taper should happen by the end of this year. We're still calling for a December announcement, but we admit that this could come sooner,” Issa adds.

Above: EUR/USD at weekly intervals with major moving-averages and Fibonacci retracements of 2020 recovery indicating possible areas of support.

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The week ahead is a quiet one for the Eurozone calendar once beyond Tuesday’s second estimate of GDP for last quarter, which consensus expects to confirm a 2% quarter-on-quarter expansion that would mean the Eurozone grew faster than the U.S. last quarter.

But with the Eurozone recovery still in its infancy and the European Central Bank (ECB) clear in its guidance that it’s not even close to entertaining any changes to its own quantitative easing programme the Euro has relatively little going for it on the domestic side and remains one of the most vulnerable currencies to any renewed offensive by Dollar which will be navigating a busy U.S. calendar over the coming days.

“Central bank policy of the two is pointed in different directions currently and our bond strategy team argue that yield divergence is only set to increase. With the Treasury-Bund differential set to head back to the March highs of 200bp (from 180bp today), clearly EUR/USD support at 1.1700 looks very vulnerable,” says Chris Turner, global head of markets and EMEA regional head of research at ING.

“In terms of data this week, we’ll get to see the first revision of the Eurozone 2Q GDP figure, provisionally at a strong 2.0% QoQ and also some final July CPI readings. Like this past week, we suspect the story is whether EUR/USD can survive at 1.1700,” Turner adds.

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There’s no shortage of material to offer the Dollar inspiration this week but the highlight will be Tuesday’s appearance by Federal Reserve Chairman Jerome Powell in an online town hall even at 18:30 and Wednesday’s release of minutes from July’s Fed policy meeting.

Both will be scrutinised keenly for clues on the Fed’s timeline for tapering its QE programme, a prospective policy change that has already proven supportive of the Dollar and burdensome for the Euro.

The Euro will be among the most sensitive to any suggestions this week that a September tapering announcement is growing more likely, but may also take note this Tuesday of U.S. retail sales data for July as well as further developments in Asia’s latest confrontation with the coronavirus.

“The evolution of market expectations about the timeframe of a tapering announcement will be nourished by forthcoming US data releases in addition to ‘Fedspeak’. Very important for the medium-term USD outlook will be any change in speculation regarding the timing of a hike in the Fed funds rate,” says Jane Foley, head of FX strategy at Rabobank.

“In anticipation of some volatility and pullbacks in the market we have held our 1 month EUR/USD forecast at 1.18. Since some movement in Fed policy is already priced-in, we have also maintained our 3 month forecast at 1.17. That said, as the Fed is transitioning to its next policy phase we have lowered our 6 month EUR/USD forecast to 1.16 from 1.17,” Foley adds.

Above: Euro-Dollar rate shown at monthly intervals with major moving-averages indicating possible areas of support and resistance.