EUR/USD Week Ahead Forecast: U.S. Data and USD Set Direction

• EUR/USD struggling to remain afloat in bearish market
• Risking retest of September lows if USD rally continues
• U.S. data & Fed in focus amid lull in European calendar

Image © European Commission Audiovisual Services

The Euro to Dollar exchange rate entered the new week on the back foot in a bearish market and may be at risk of falling back near to its late September lows in the days ahead unless data emerging from the U.S. economic calendar or some other factor is able to stall the ongoing rally in U.S. exchange rates.

Europe's single currency slipped below 0.97 against a broadly stronger Dollar during early trading in Europe on Monday when risky assets were given a wide berth as investors digested weekend developments in Ukraine and the reopening of Chinese financial markets following a week-long holiday. 

"The US dollar is deriving support from more risk-averse trading conditions at the start of this week which reflects in part the hawkish repricing of Fed rate hike expectations but also some uneasiness over the conflict in Ukraine," says Lee Hardman, a currency analyst at MUFG. 

"The attack over the weekend by Ukraine on the Kerch Bridge linking Crimea to Russia threatens Russia’s ability to resupply forces in the south, and perhaps more importantly is crossing Russia’s self-proclaimed red lines," Hardman said in a Monday market commentary. 

Above: Euro to Dollar rate shown at hourly intervals with Fibonacci retracements of late September recovery indicating possible areas of short-term technical support. 

The Euro did not benefit when Dutch central bank governor and member of the European Central Bank (ECB) Governing Council Klas Knot said "the ECB will continue to raise interest rates until there is once again a credible prospect of a return to the stability target of 2% inflation in the medium term."

Monday's loss left the Euro on course for a fourth decline at the opening of what will be a quiet week for European economic data but a busy period for the U.S. calendar, which offers inflation figures for September as well as retail sales data and public remarks from a range of Federal Reserve (Fed) officials.

"This week’s data calendar in the Eurozone is relatively light with focus likely to be on speeches by the ECB Chief Economist Philip Lane today and tomorrow, and the ECB President Christine Lagarde on Wednesday," says Valentin Marinov, head of FX strategy at Credit Agricole CIB.

The Euro and other currencies have come under almost relentless pressure from the Dollar in recent months but were further burdened in late September by the much more hawkish interest rate stance adopted by the Federal Reserve last month.

Above: Euro to Dollar rate shown at 4-hour intervals with Fibonacci retracements of late September recovery indicating possible areas of short-term technical support. 

Meanwhile, much of the data emerging from the U.S. has continued to cast the economy in a resilient light while vindicating the Fed's more hawkish stance.

"EUR/USD will remain heavy amid a backdrop of a strong USD this week. US relative economic outperformance and an impending global recession suggest a sustained move back above 1.00 in the near term is unlikely," says Carol Kong, an economist and currency strategist at Commonwealth Bank of Australia. 

"The broader macro backdrop suggests hawkish comments from ECB officials this week will have little more than a fleeting impact on EUR. ECB chief economist Philip Lane speaks today (2pm London time)," Kong wrote in a Monday market commentary.

While the Euro has already fallen a long way against the Dollar and financial markets have more or less fully priced-in the Fed's September interest rate forecasts, the Dollar has shown few signs of abating in its advance and so the risk is of further losses for the single currency this week. 

Above: Euro to Dollar rate shown at daily intervals. 

"Markets are almost fully priced for the Fed to raise its funds rate by a further 75bp in November, to 3.75-4.0%. But pricing could change in either direction if US CPI surprises," says Sean Callow, a senior FX strategist at Westpac. 

"Consensus is for the headline rate to ease slightly to 8.1%yr but for CPI ex-food and energy to pick up from 6.3%yr to 6.5%yr, matching the fastest core inflation rate since 1982," Callow wrote in a Monday look at the week ahead. 

The Euro could benefit this week if Thursday's data reveals a surprise moderation in the U.S. core inflation or if Friday's retail sales figures surprise sharply on the downside of expectations, although recent history suggests that any relief of this kind is likely to be only fleeting. 

Thursday's inflation figures are the highlight of the U.S. calendar this week but Wednesday's minutes from September's Fed meeting and Friday's publication of September retail sales figures will also be scrutinised closely by the market too. 

"Barring disappointments from US data, the euro remains exposed to new downturns: key supports in the EUR/USD 0.95 area, but risks of new lows being marked (at EUR/USD 0.93-0.92) by year-end," says Asmara Jamaleh, an economist at Intesa Sanpaolo.