Euro to Dollar Week Ahead Forecast: Trump Threats & Barnier Woes Conspire to Ensure Heavy Tone

Above: File image of French Prime Minister Barnier. Photographer: Jennifer Jacquemart, © European Union, 2020. Source: EC - Audiovisual Service

The Euro would be looking to extend a recent recovery against the Dollar were it not for USD-supportive tariff threats from President-elect Donald Trump over the weekend. In addition, a crunch moment for France's government makes it difficult for the EUR to justify higher levels.

The Euro to Dollar exchange rate (EUR/USD) is three-quarters of a per cent lower on the day at 1.0495, having been as high as 1.0596 on Friday.

The Dollar is broadly firmer at the start of the new week after Trump said he would levy a 100% tariff on any BRIC nations that sought to move away from the U.S. Dollar with a view to establishing a BRICs currency.

"The idea that the BRICS Countries are trying to move away from the Dollar while we stand by and watch is OVER. We require a commitment from these Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100% Tariffs," said Trump on social media.

The Dollar has tended to strengthen on rising prospects of U.S. tariffs as they 1) penalise non-dollar currencies and 2) raise the odds for higher U.S. inflation, which requires more restrictive interest rates at the Fed, which are in turn supportive of the Dollar.

"U.S. data poses some downside risks to the dollar, but the continued and expanding threat of tariffs from the incoming Trump administration should limit the size of the correction," says Chris Turner, Head of FX Research at ING Bank.

However, developments in France are also weighing at the start of the new week.

The Euro was under pressure on Monday following the weekend news that France's finance minister, Antoine Armand, said his government won’t accept artificial budget deadlines from the National Rally (RN). The RN is a key party that Prime Minister Michel Barnier needs on board if it is to pass its budget.

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But RN leaders said on Sunday that the government had rebuffed its calls for more budget concessions.

"French politics looks to be belatedly playing a role in FX and driving some euro underperformance," says Turner. "French politics can help solidify EUR/USD resistance at 1.0570/1.0600 this week, while short-term support will be found in the 1.0465/1.0500 area."

ING has 1.05 as an end-year EUR/USD forecast, "but see downside risks here."

The apparent deadlock makes a no-confidence vote in Barnier's government highly likely, raising the prospect of further rises in French government bonds.

RN figurehead Marine Le Pen had previously given the government until Monday to agree to RN's budget demands or face the threat that they would back a likely no-confidence motion against his government, which would trigger its collapse.

Developments are reflected in a turn lower on the charts for EUR/USD, and further weakness now becomes possible:

Recently, EUR/USD looked to be consolidating above 1.04, with a fresh attempt to retake 1.06 growing in likelihood.

The rally never really built up enough steam to turn some technical indicators into more constructive territory; for instance, the pair remains below any moving averages worth looking at.

The RSI is at 39 and has turned to point lower again in a sign that upward momentum has faded and the downside is becoming more attractive.

Yet, it could still be too soon to say EUR/USD will break fresh lows.

For one, we are near a 'peak pessimism' point for the under-pressure EUR, with ample rate cuts at the European Central Bank and poor growth dynamics already priced in.

At the same time, the strength of the U.S. economy is reflected in whittled-down U.S. Federal Reserve interest rate cut expectations, which will struggle to move much further.

Consequently, the Dollar may come under pressure if this week's U.S. data disappoints.

The ISM manufacturing release is due Monday. A reading of 47.5 is expected, consistent with the broader retreat the global manufacturing sector is currently experiencing.

Federal Reserve policy-maker Waller is scheduled to speak today, which could shed some light on the prospects for further rate cuts in 2025. Williams is also scheduled to speak later in the day.

Kugler and Goolsbee are due to speak on Tuesday.

Wednesday will see the release of the more important services PMI from the ISM. This will give a more accurate insight into how the broader economy is evolving, which could elicit a stronger reaction from the Dollar.

The PMI is expected to read at a healthy 55.5%.

Friday is the more important day as we will receive the U.S. employment report. Analysts expect 183K jobs to have been created in November.

Anything less will bolster rate cut expectations, which can weigh on the Dollar.

Also, keep an eye on average hourly earnings, which are expected to have risen 0.3% month-on-month in November, while the unemployment rate is expected to steady at 4.1%.

To be sure, much good news is already priced into the Dollar, and we wonder whether 'peak USD' is at hand.

Also, note that December is traditionally a month of USD weakness, and if history repeats, the EUR/USD could find itself better supported in the coming weeks.