Euro to Dollar Week Ahead Forecast: EURUSD Heavy into ECB Rate Cut

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The Euro to Dollar exchange rate (EUR/USD) is forecast to test the 200-day Moving Average as sellers look forward to Thursday's European Central Bank interest rate cut.

Having cut in September, the ECB was only supposed to cut interest rates once more in 2024 at the December meeting.

However, data and events simply won't allow for such a pedestrian approach by policymakers in Frankfurt: since the September decision, we've had unexpectedly weak inflation data and further confirmation Germany's economy is at risk of slipping into recession.

Add to this an austere fiscal shock in France, where the government last week announced billions of euros in spending cuts and tax rises. The Eurozone's economy simply isn't on the inflationary footing that it was a mere six months ago.

The realisation that the ECB will act again has contributed to a drift lower in EUR/USD to below 1.10, and the next major target is the 200-day moving average located at 1.08736.

We place high odds on a test of such a level at some point over the remainder of October.

Above: EUR/USD at daily intervals. The RSI indicator in the lower panel is consistent with further downside, but the pace of decline has clearly eased.

But why aren't we anticipating a test of this level this week?

Firstly, the Dollar is losing some impetus. Let's not forget the USD side of the equation which has arguably been the dominant force in EUR/USD's decline.

The Dollar has powered higher in October as markets whittle down expectations for the quantum of rate cuts to land over the remainder of 2024 thanks to consensus-beating U.S. economic data releases.

The U.S. economy is not in need of an urgent pace of rate cuts. The paring of such expectations has bolstered U.S. bond yields and the Dollar.

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But, the move looks to have run its course in the short term, with markets now seeing less than two further 25 basis point cuts over the remainder of the year. Is this feasible? Not so, say economists who think the Fed still wants to deliver two more cuts.

"It seems to me that the spike in US yields has just about run its course, and what we will continue to see, is a bumpy rather than trending FX market," says Kit Juckes, head of FX analysis at Société Générale. "Next month’s labour report is going to be messed up by hurricanes, which would argue for cutting 25bp rather than pausing, in my opinion."

Secondly, the ECB rate cut is baked into the price of the Euro and the event itself won't come as a surprise. 'Sell the rumour, buy the fact' is a potential reaction to this week's meeting.

The ECB will signal the cut is confirmation it is being proactive on the rates front and that this could allow it to assess incoming data.

That would mean a steady pace of cuts going forward, with limited chance for the market to aggressively reprice expectations towards an acceleration in the pace of cuts.

"A non-dovish rate cut by the ECB will probably limit further EUR-USD weakness," says Roberto Mialich, FX Strategist at UniCredit.

"We expect the ECB to cut the policy rates again by 25bp which would bring the deposit rate to 3.25%, and markets agree with our view," says Minna Kuusisto, an economist at Dankse Bank. "Focus will again be on Lagarde's remarks and especially the Q&A session. Even if ECB's forward guidance has been non-existent, markets seem convinced that rates will be cut at a relatively steady pace from here."

US Retail Sales, Elections in Focus

The U.S. calendar is dominated by the midweek release of U.S. retail sales figures, which will give an insight into the state of the consumer.

A reading above 0.3% month-on-month would bolster the Dollar as it would underpin the recent tendency of the market to discount further aggressive easing at the Federal Reserve.

This message will likely be reiterated by a bevvy of U.S. Federal Reserve governors, with Waller, Kashkari and Bostic all due to speak this week. Kugler, a relative newcomer to the FOMC, will speak on Tuesday.

The U.S. election is getting closer and could well start to dominate FX market action. Currently, forex market measures of volatility show investors are prepared for volatility to steadily rise into the vote.

The outcome of the presidential election is virtually a 50/50 call, which should create enough uncertainty to keep the Dollar bid.

The election is another reason why the prospect of EUR/USD testing the 200 DMA is likely in the short-term.