Ambitions of 1.12 Dealt a Blow: The Euro to Dollar (EUR/USD) Week Ahead Forecast

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The Euro to Dollar exchange rate was all set for a test of 1.12 this week, but a disappointing PMI release on Monday could have scuppered this objective.

The Euro to Dollar exchange rate started the new week in chipper form but is down 0.60% on the day as I write, reaching 1.1094.

The setback follows the release of poor PMI data for September that shows the Eurozone economy has slowed markedly and that there is a growing need for more stimulatory support from the European Central Bank (ECB). 

"The euro's decline today follows more shocking data from the Eurozone, dimming hopes for a return to growth and fueling expectations of further interest rate cuts from the ECB," says Samer Hasn, Senior Market Analyst at XS.com.

The PMI survey for the Eurozone showed a deceleration in activity during September, with a Composite PMI reading of 48.9, down from 51 and below expectations for a reading of 50.6. Any reading below 50 signals contraction.

"The fall in output was the first in seven months and was registered amid a sustained reduction in new orders. In fact, new business decreased at the sharpest pace since January," says S&P Global, compilers of the PMI.

These data make the case for the ECB to speed up the pace it intends to cut interest rates. It could choose to deliver another cut as soon as October. It could also decide to cut by 50bp at the December meeting when markets had expected the next move.

Above: EUR/USD at daily intervals.

Whatever the case, the data is arguing for more haste from the ECB, and this can lower Eurozone interest rate expectations, pressure bond yields and pressure the Euro.

Despite Monday's falls, the overall setup in Euro-Dollar remains constructive and we wouldn't yet give up on ambitions for a test of 1.12.

Last week's strong advance against the Dollar are courtesy of developments in the U.S., where last week's hefty 50 basis point interest rate cut from the Federal Reserve sparked a fresh impulse of Dollar weakness.

We note signs of overextension in several Dollar exchange rates and wonder if the U.S. Dollar is due a comeback in the coming days as recent moves are consolidated. This is a risk that we see in Pound-Dollar, and any pullback there would likely reflect weakness in the headline Euro-Dollar.

From a technical perspective, there is only one level in town: that of 1.12. This is where previous multi-week rallies failed in August 2024 and mid-2023. "EUR/USD will test resistance at 1.1202, its recent high, if the USD continues to ease as we expect," says Kristina Clifton, a foreign exchange analyst at Commonwealth Bank.

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A test of 1.12 looks likely, but whether it occurs this week is another matter. As mentioned already, the Dollar's recent weakness looks overdone, and some consolidation might be called for.

"The likelihood of EUR breaking above the year-to-date high of 1.1200 has increased. However, it remains to be seen if EUR has enough momentum," says Peter Chia, Senior FX Strategist at UOB. "Momentum indicators are turning neutral, and EUR could continue to trade in a quiet manner."

We will focus on U.S.-based risks over the remainder of the week, with Friday’s core PCE figures being the data highlight as this is the Fed's preferred inflation gauge.

Markets look for inflation to have risen 0.1pp to 2.7% year-on-year in August. Rising inflation is at odds with expectations for a generous flow of Fed rate cuts from now until late 2025, and should the market sober up to this apparent contradiction, then the Dollar can recover.

Also keep an eye on the various Federal Reserve policymakers who are due to give speeches this week. Any sounds of caution regarding the pace of future cuts can give the market reason to rebalance lower from last week's euphoria.

"Fedspeak returns with a vengeance this week, as a whole host of policymakers make remarks now that the ‘blackout’ period has concluded. Thursday’s comments from Chair Powell, dissenter Bowman, and NY Fed President Williams will be of most interest to participants," says Michael Brown, an analyst with Pepperstone.