EUR/USD Rate Eyes 1.06: The Week Ahead Forecast

The Euro to Dollar exchange rate looks at risk of further weakness in the coming five days, particularly if Eurozone inflation data undershoots.

The Euro put in a tepid recovery against the Dollar last week but the gain was not convincing owing to Friday's sizeable late-session selloff.

Selling pressure reminds us that this exchange rate is in a technical downtrend, and any strength must be regarded as short-term. Dollar buyers must be prepared to jump on these relief rallies.

We note Euro-Dollar broke below 1.0711 on Friday, which forms the 61.8% Fibonacci retracement of the late-2023/early-2024 rally. The failure suggests we are staring the 78.6% Fib line in the face again. The chart below shows this is where the recent selloff found support and a bounce ensued.

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The level could be approached in the first half of the week if the all-important Eurozone inflation numbers come in soft.

German inflation figures form the initial focus with state-level releases starting in the European morning Monday, with the final all-Germany release due at 13:00 BST (expected: 2.3% y/y, previous: 2.2%).

French CPI inflation is due Tuesday at 07:45 BST (expected: 2.1%, previous: 2.3%). Between the German and French figures we could get a good steer as to where the Eurozone release is heading.

Eurozone CPI is released at 10:00 BST on Tuesday, with the market expecting 2.4% y/y, unchanged on March. The core CPI is expected at 2.8%, down from 2.9%.

Any undershoots will raise the odds that the European Central Bank cuts interest rates again in July, having already done so in June. It is the timing of the second ECB cut that matters for markets, given a June move is well telegraphed.

But, should inflation figures beat expectations, expect the Euro to rally against the Pound and Dollar, as markets would see a low likelihood of a July rate cut.

Image courtesy of UniCredit.

Indeed, a strong print would raise questions as to whether a June cut is at all appropriate, which would support the Euro.

But it is the U.S. end of the equation that tends to have the larger influence on Euro-Dollar, and there are some significant events on the calendar.

With market expectations for the first rate cut at the Federal Reserve having receded to December following last week's hot consumer spending figures, the coming week's figures will determine whether a 2024 rate cut is even on the cards or whether we will have to wait until 2025.

Wednesday's Federal Reserve policy update will be the first key test for the Dollar as investors will be interested to know whether the Fed is ready to validate market expectations for the first rate hike to come in December.

Recall, the Fed's most recent dot plot forecasts showed policymakers expect three rate cuts in 2023. The Fed will have to concede this is a tad ambitious in the face of the incoming data which shows the economy is starting to generate heat again.

The Dollar will strengthen if the Fed cautions its previous expectations look to generous. "A prudent Fed will likely keep the USD firm, thwarting the recovery attempts of the EUR and the GBP," says Roberto Mialich, FX Strategist at UniCredit Bank.

The big data event of the week will be Friday's job report: weakness here will signal that finally a turning point is coming. We would expect a sizeable stock market rally and a drop in the Dollar if the headline non-farm payroll figure undershoots the 210K the market expects.

But, this is an economy that seems to perpetually surprise to the upside, so we wouldn't hold our breath. Another beat would send the Pound-Dollar rate below the 1.25 level once more.