EUR/USD Week Ahead Forecast: Besieged by Headwinds as Inflation Data Eyed 

• EUR/USD remains under pressure near 2020 lows 
• French election relief limited as USD & CNH weigh 
• USD strength & CNH losses a burden for EUR/USD
• CPI, GDP data in focus for EUR as USD eyes PCE 

Image © European Union - European Parliament, Reproduced Under CC Licensing.

The Euro to Dollar rate reached a fresh two-year low to open the new week and could be set to remain under pressure over the coming days due to domestic economic risks and international headwinds like the strong U.S. Dollar and falling Chinese Renminbi. 

Europe’s single currency gained no benefit from Sunday’s re-election of French President Emmanneul Macron and instead fell close to 1.07 and its lowest since April 2020 to open the new week on Monday.

“Markets had clearly priced in little-to-no chance of a Marine Le Pen victory and the positive impact on EUR/USD was contained and very short-lived,” says Chris Turner, global head of markets and regional head of research for UK & CEE at ING. 

Monday's loss came alongside fresh declines for the Renminbi and amid speculation about a possible ‘lockdown’ of the capital Beijing, which may also have helped the Dollar to rise further against other major currencies.

Above: Euro to Dollar rate shown at daily intervals with spread or gap between 02-year German and U.S. government bond yields.

“How far the Chinese authorities allow the yuan to weaken will make a big difference. It's playing catch-up with other currencies' falls against the dollar but when an elephant falls over it can do a lot of damage,” says Kit Juckes, chief FX strategist at Societe Generale. 

“It is unlikely that EUR/USD will stop falling until USD/CNY peaks. Indeed, it is unlikely the dollar peaks overall, before the USD/CNY has peaked, and when that happens depends as much on the Chinese authorities as the US,” Juckes said in a Monday market commentary. (Set your FX rate alert here).

While fears for the Chinese economy are one source of pressure, the Euro-Dollar also remains at risk from the increasingly aggressive stance of Federal Reserve (Fed) monetary policy, which continued to lift the Dollar last week.

This was after Fed Chairman Jerome Powell’s suggested on Thursday that larger-than-usual increases in U.S. interest rates are likely to be seen in the months ahead. 

Above: Euro Dollar rate shown at weekly intervals alongside Renminbi-U.S. Dollar rate. 

Dollar gains more than reversed the Euro rally that followed European Central Bank (ECB) policymakers’ calls for a faster pace of policy normalisation and vocal support for an increase in Eurozone interest rates as soon as July.

Growing continental inflation pressures will be back in focus on Friday when Eurostat releases its preliminary estimate for April, which some economists see coming in at an annualised 7.5%, up from 7.4% previously. 

While an upside surprise on Friday would likely encourage ‘hawkish’ sentiments among ECB policymakers, some analysts doubt it could turn the tide for the Euro-Dollar rate for much more than a moment.

“The already hawkish market pricing for ECB tightening means that any upside surprise may fail to materially lift the euro. We expect EUR/USD to keep hovering around the 1.0800 level this week, although some idiosyncratic dollar strength may trigger a break below 1.0700,” ING’s Turner said Monday.

Above: Euro Dollar rate shown at weekly intervals with Fibonacci retracements of 2017 rally indicating possible medium-term areas of technical support. 

That potentially leaves a lot about this week's outlook to be determined by the market response to GDP figures from the Eurozone and U.S. as well as Friday’s core PCE price index.

The latter is the Fed’s preferred measure of inflation and would potentially pose a downside risk to the Dollar and be supportive of the Euro if economists are right to expect the month-on-month pace of U.S. inflation to ebb lower for a second consecutive month.

That could encourage speculation that U.S. inflation may have peaked, potentially taking wind from the Dollar’s sails, although both the Euro and the Dollar will also be sensitive this week to the publication of first quarter economic growth figures for the U.S. and Eurozone on Thursday and Friday.

“Energy costs and energy security remain a clear risk for the Eurozone and are likely to act as a restraint on the performance of the single currency,” says Jane Foley, head of FX strategy at Rabobank. 

“We expect EUR/USD to push back to its 1.10 pivot into the summer and beyond,” Foley said following a review of Rabobank’s forecasts last week.