Euro to Dollar Week Ahead Forecast: European Central Bank Risk Emerges

Image © European Central Bank

The Euro to Dollar exchange rate is trading buoyantly at more than three-year highs and should remain well-supported above 1.1171 during a week ahead, however, the risk is of the European Central Bank seeking to dampen the rally following its Thursday monetary policy decision.

EUR/USD rallied further last week, to highs around 1.1477 and its best level for more than three years, as US currency, bond and stock markets unravelled amid an escalating trade conflict between Washington and Beijing, and a souring of market sentiment toward all things American.

“Well what a week! Price action was incredible and as I said yesterday, very much supportive of the view of a more fundamental shift in thinking around the US as an investment destination,” says Laoise Ni Thighearnaigh, a trader on the FX desk at JPMorgan, in a Friday commentary.

“Now we are above 1.1215 (Sept 24 high), 1.1275 (2023 high), the next target is the 1.15 area, which was the exuberant high before the Ukraine invasion in Feb 22. I remember it well cos was mega bullish at the time then as well!!!!!!! Good luck out there,” she adds.

Above: Euro to Dollar rate shown at daily intervals with Fibonacci retracements of January recovery indicating possible areas of technical support. Click for closer inspection.

Thighearnaigh says “the USD remains very heavy and it feels like it is now taking on a life of its own as it ignores gyrations in other asset classes and correlations, which smacks of large allocation shifts,” and that there is a risk of “further US policy flip flopping” that might “only exacerbate the problem.”

Hence why the broader trajectory for EUR/USD is still very much upward, with the outlook remaining bullish, and not least because of the implications that current US policies on trade tariffs and inflation have for the outrageous valuations still prevailing across all of the major US equity markets.

Tariffs are set to erode profits and margins for corporate America, partly because of the White House pledge to curtail inflation, which demands lower stock prices in order to prevent market-multiples-based valuations rising, and this downward adjustment becomes even larger in circumstances where valuations have to fall.

However, capital repatriation by investors from current account surplus countries and the broad-based losses of the Chinese Renminbi have placed the trade-weighted Euro on an upward trajectory at a time when commercial competitiveness is a top concern for European policymakers.

Above: Euro to Dollar rate at weekly intervals with Fibonacci retracements of January 2021 decline indicating possible areas of technical resistance. Click for closer inspection.

Euro gains will also reduce inflation in the Euro Area and likely lead the ECB to adopt a more dovish policy stance on Thursday, which could temper the rally in EUR/USD - if not lead to a temporary setback.

The European Central Bank is set to announce its latest policy decision on Thursday and the consensus around the market is for another cut to the once-negative deposit rate, taking it down to 2.25%, which will leave many focused on the subsequent press conference and any distress signals over the exchange rate.

“A rising Euro will add to the woes of European industry as it faces tariff and defence spending pressure from the USA, the loss of Russian energy supplies and China’s switch from customer to competitor,” says Benjamin Picton, a strategist at Rabobank, in a Monday market commentary.

“Despite Europe’s Byzantine political system and ongoing competitiveness problems, it appears that some traders at least are interpreting sclerosis as stability and marking Europe up for the fiscal headroom enjoyed by the likes of Germany and the Netherlands,” he adds.