Euro to Dollar Week Ahead Forecast: Finding a Floor Above 1.05

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The Euro to Dollar exchange rate (EUR/USD) looks to be forming a base above 1.05 as it recovers from oversold and the 'Trump trade' takes a breather.

The Euro reached technically oversold conditions against the Dollar last week and we are currently seeing some tentative recovery potential.

EUR/USD is at 1.0565, having been as low as 1.0495 last week, and the Relative Strength Index (RSI) has turned higher, having dipped below 30 last week.

A reading of 30 is significant in that it signals an asset is oversold and due a rebound or period of consolidation.

Above: EUR/USD broke below its 200-day moving average and entered a downtrend in the process. But the RSI is recovering from oversold (lower panel).

The coming week could see the Euro firm against the Dollar as this unwind from oversold continues.

"We continue to see moves below EURUSD 1.05 as short-lived, while the euro remains remarkably stable in most European crosses," says a weekly FX note from the UBS Chief Investment Office.

The fundamental picture could also advocate for some near-term relief as it remains one driven by the massive realignment in expectations following Donald Trump's election victory.

Last week saw Trump announce some significant appointments that markets read as a sign he is fully committed to his election rhetoric, namely the intention to pursue tariffs, cut taxes and boost U.S. energy output.

This raises the risk that U.S. inflation remains elevated for longer while also bolstering the idea that the U.S. economy is set to outperform its peers in 2025.

All this spells for a stronger Dollar.

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The market is rushing to price this in, and looks to be following the 2016 playbook when Trump won his first presidential election.

But, analysts think the initial phase of the 'Trump trade' might be nearing completion.

"To the extent that 2016 price action becomes a more dominant FX market template from here, we can conclude that many Trump-related positives are already in the price of the USD," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

We will now be on alert for Trump to spell out his tariff policy, which we think could be the next catalyst for global forex. Until then, we could see some wait-and-see price action that could involve the retracement of recent USD strength.

"There is a limit to the dollar's strength," says UBS.

"The Fed signalled at its last meeting that monetary policy remains in the restrictive territory and that further rate cuts are needed to ensure a soft landing. Markets have gone too far in pricing out Fed rate cuts, in our view. As a result, we see a higher likelihood of lower U.S. yields from here," adds the UBS note.

There are no major data events due from the U.S. this week, which will leave the market beholden to Trump news. This is a risk for the Euro-Dollar, particularly given Trump seems intent on pursuing his agenda from day one in office.

The Euro's recent weakness also has political dysfunction in Germany to thank, with the country now set to vote on a new government in February. At the same time, data out of the Eurozone has been poor, prompting the market to see high odds of a 50 basis point rate cut at the European Central Bank (ECB) in December.

But, the UBS CIO thinks "a lot of negative news has been priced into the euro in recent months, helping to increase rate-cutting prospects for the European Central Bank."

The highlight of the week for the Eurozone is the November PMI survey release, which will provide some colour on recent events.

An above-consensus reading could help EUR/USD form a floor, but an undershoot in the figures could see the exchange rate paint another red weekly candle as the market prepares for a potential 50bp rate cut at the ECB next month.