Euro-Dollar Week Ahead Forecast: Sellers Lay in Wait as Fed and ECB Minutes Eyed

Modified: Monday, 23 August 2021 07:21 BST
Written by: James Skinner

- EUR/USD steadying but support shifting to 1.16
- Recoveries seen meeting resistance above 1.18
- Sellers lay in wait as Fed speech, ECB mins eyed
- Putting Fed-ECB divergence back under spotlight

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Spot: 1.1716
Bank transfers (indicative guide): 1.1306-1.1388
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The Euro-to-Dollar exchange rate has been quick to rebound following recent global market turbulence but has prospective sellers already waiting in the wings and faces a dense scrub of resistance barriers at nearby levels overhead, which could potentially see its recovery curbed in the week ahead.

Europe’s single currency fell to fresh 2021 lows against the Dollar last week, appearing to give up an important layer of technical support at 1.17 in the process while leaving little between it and the next round number at 1.16 to break any renewed falls over the coming days.

Euro-Dollar declines have been limited however, with the Euro potentially benefiting from the recent unravelling of commodity currencies after being sold earlier in the year in order to fund inventors’ wagers on exchange rates and assets offering exposure to what was expected to be a broad global economic recovery, the prospect of which has been on the rocks of late.

Walking away or simply paring back those wagers will have seen some investors compelled to buy back the Euro in a process that would explain the both the Euro-Dollar rate’s recent resilience, as well as the “bullish divergence” between the falling exchange rate and a now-rising relative-strength-index measure of momentum on the charts, which technical analysts say could EUR/USD to stabilise over the coming days.

“This divergence argues for selling a bounce rather than chasing a break” says Paul Ciana, chief technical strategist at BofA Global Research, who’s flagged scope for last week’s Euro-Dollar breakdown and concurrent rally in the Dollar Index since late July.

Above: BofA Global Research EUR/USD chart with technical indicators and analysis.

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The Euro came under pressure alongside others last week while the greenback advanced against all major currencies to become the best performer in the G10 contingent for the year-to-date, as investors fretted about the global economic outlook and the Federal Reserve (Fed) signalled again that a landmark change in its monetary policy is likely to be seen in the months ahead.

“The risk for lower EUR has grown. There are now strong continuation signals for EUR downtrends against GBP, CAD, and NZD, and a reversal signal for the EUR uptrend against AUD,” says Vadim Iaralov, a quantitative strategist at BofA Global Research.

While global markets have since stabilised and enabled the Euro-Dollar rate to rebound into the new week, divergence between Fed and European Central Bank (ECB) monetary policy will be back under the spotlight again over the coming days and is another reason why the single currency could struggle to extend its recovery much further this week.

“The low of 1.1665 was not confirmed by the daily RSI and we would allow for some minor consolidation ahead of losses to 1.1602, the November 2020 low,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

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“Rallies should find decent resistance at this week’s high of 1.1804 and will ideally be contained by the short term downtrend also at 1.1804 for a negative bias to remain entrenched,” Jones writes in a Friday note.

Jones advocated last week that clients sell Euro-Dollar rallies to the 1.1740 area and flagged the single currency’s recent high at 1.1804 as well as a trendline around the same level as likely to call a halt to any further recovery.

The 1.1804 level coincides closely with the initial Fibonacci retracement of EUR/USD’s corrective fall since June, which is reinforced by the initial 23.8% retracement of 2021’s overall move lower located up at 1.1825.

The above are in turn buttressed by a falling 55-day average at 1.1867, and make for a dense scrub of formidable resistance that could act as an open invitation for sellers this week in the absence of a catalyst to reverse the market’s bearish view on the Euro, or its bullish outlook for a resurgent Dollar.

Above: Euro-Dollar rate shown at daily intervals with 55-day moving-average and Fibonacci retracements of June and overall 2021 declines indicating possible resistances.

The problem for the Euro-Dollar rate however is that Thursday brings minutes from July’s European Central Bank meeting, which will risk drawing investors’ attention back toward the possibly lengthy gap between the point at which the Fed is likely to begin packing away its crisis-fighting policy tools, and the time when equivalent steps are seen as likely to be taken in Frankfurt.

“Broad dollar strength is keeping EUR/USD offered,” says Chris Turner, global head of markets and EMEA regional head of research at ING, who told clients last week there’s a risk of the Euro-Dollar rate slipping toward 1.16 over the coming days.

“The dollar is being driven higher by the combined forces of a Fed moving towards a taper and the re-assessment of global growth prospects on the back of the Delta Variant. The former will very much be in focus this week,” Turner says.

ECB minutes come before Friday’s address from Fed Chairman Jerome Powell at the annual Jackson Hole Symposium in Wyoming at 15:00 London time, which is the highlight of the week for the global market and will bring the collective focus back to a Dollar-supportive U.S. policy and specifically the question of when the bank is likely to begin winding down its $120BN per month quantitative easing programme.

Minutes from the Fed’s own July meeting suggested last week the bank could announce as well as commence the process of tapering the bond buying programme before the year is out, putting further wind in the sails of the greenback and weighing on the Euro-Dollar rate along the way.

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