Euro to Dollar Week Ahead Forecast: 1.10

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The Euro's rally against the Dollar looks to have entered a consolidation phase, and we think it can retreat further in the coming week.

The Euro to Dollar exchange rate ripped higher in August, peaking at 1.12 last Monday, but this stretch higher took it firmly into overbought territory and alarm bells were officially triggered on the Relative Strength Index (RSI).

As per the rulebook, an RSI above 70 - which we saw at the start of last week - would need to come down, which would entail a pullback in the Euro exchange rate. Our previous Week Ahead Forecast recognised this and proved bang-on in suggesting a peak had been reached.

We don't think a retest of last week's highs are on the cards in the coming days, and we are more inclined to anticipate lower levels from here, with 1.10 coming back into play before a potential restart of the broader 2024 rally.

Tanmay Purohit, a technical analyst at Société Générale, says the euro's pullback could extend to $1.0950/1.09 before stopping.

"Signals of large downside are not yet visible. 50-DMA near 1.0950/1.0900 is near term support zone. Only if the pair breaches this would there be risk of a deeper decline," he says. "Defence of 1.0900 can lead to continuation in up move."

Image courtesy of Société Générale.

Ultimately, the duration and depth of the current pullback will rest on this week's U.S. data, as they will determine the size of September's Federal Reserve rate cut.

A 25 basis point September rate cut is now fully discounted by the market and explains USD underperformance over recent weeks. The selloff accelerated on rising odds that the first cut could involve an unusual and outsized 50bp cut, owing to evidence that the economy was starting to slow notably.

However, we think that the odds of a 50bp cut can recede further on a stronger-than-expected U.S. non-farm payroll report on Friday, which can further bolster the Dollar and weigh on EUR/USD.

"The incoming data this week has generally supported our view that the US is on track for a soft landing, and if we are right in thinking that payrolls growth will rebound a bit from the surprise weakness in July, the odds of a 50bp cut from the FOMC at its next policy meeting will probably recede further," says Jonas Goltermann, Deputy Chief Markets Economist at Capital Economics.

"Combined with continued soft data out of the euro-zone supporting the case for further ECB cuts, that may help the greenback continue to stabilise," he adds.

The market expects a payroll print of 163K for August, up from 114K in July, a figure that was impacted by Hurricane Berryl passing through Texas.

"A paring back of Fed rate cut expectations should see the USD recover some lost ground," says a strategy note from analysts at HSBC, which finds the USD now looks cheap relative to fundamentals.

Lars Mouland, an analyst at Nordea Bank, says Hurrican Beryl, which swept through Texas on July 8th, might have been the main reason the July employment numbers looked so bad.

"We expect a rebound in next week's data will remove some of the recession fears," says Mouland.

He explains that economic activity was also impacted by Beryl as the entire 140K national drop in July housing starts can be traced back to the Southern states, with no discernible changes elsewhere.

Ahead of Friday's job report, we will be covering survey figures in the form of Tuesday's ISM manufacturing PMI, which is seen at 47.5, up from 46.8.

Thursday's ISM services PMI will be watched closely, with the market expecting a print of 50.9 in August, down from 51.4.

Strong PMI figures would see the Dollar firm ahead of the all-important job report.