Euro to Dollar Week Ahead Forecast: Capped by 200 DMA

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The Euro is in a downtrend against the Dollar and further losses are likely over the coming five days.

The Euro to Dollar exchange rate (EUR/USD) broke below the 200-day simple moving average last week, in what amounts to a notable technical deterioration.

Our Week Ahead Forecast model sees the 200 DMA as a key line, with an exchange rate being in a multi-week downtrend when below and an uptrend when above.

"The 200 day moving averages can be key pivot points over long horizons and currencies along with other assets tend to get 'trapped' above or below their moving averages for months at a time," explains W. Brad Bechtel, an analyst at Jefferies, the investment banking and capital markets firm.

The 200 DMA is located at 1.0871, and early indications suggest the technical level is now acting like a cap, with rebounds last week unable to clear the hurdle

The coming days could, therefore, see EUR/USD struggle below the 200 DMA and prone to retest last week's low at 1.0810.

Fundamentally, the Euro is under pressure as markets are now of the opinion that the European Central Bank (ECB) will cut interest rates more, and at a faster pace, than the U.S. Federal Reserve.

This has lowered Eurozone bond yields relative to those of the U.S. and is providing a fundamental narrative for Euro-Dollar downside.

"Near-term support rests at 1.0778, the early August low. A deeper fall cannot be ruled out in a repeat of 2016 if U.S. yields gain upward traction after the presidential election," says Kenneth Broux, an analyst at Société Générale.

The ECB last week responded to the Eurozone's softening inflation dynamics by cutting interest rates by a further 25 basis points.

The coming week is peppered with ECB speakers, including President Christine Lagarde herself, who will touch on that decision and what the future holds. Upside risks to the Euro would involve ECB members seeking to cool expectations for the pace of future cuts, which is a possibility given how agressive pricing has become of late.

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According to the market, the ECB is now more inclined to cut rates than the Fed; markets are less convinced that there is a pressing need to cut U.S. interest rates owing to consensus-beating economic data that suggest the American economy has picked up momentum heading into the final quarter of the year.

The Fed will cut interest rates again in early November, but it won't be by as much as previously expected (25bp and not 50bp) and there is a decent chance the Fed advocates caution regarding future rate cuts.

The U.S. election is less than two weeks away, and analysts say recent USD outperformance is linked to signs that Donald Trump is the favourite to win the vote.

His tariff-heavy trade policy and generous tax-cutting agenda are both held to be supportive of the Dollar's outlook.

"With Donald Trump gaining ground in the polls, markets are beginning to factor in a possible win, which could keep the greenback supported," says Fawad Razaqzada, an analyst at City Index.