EUR/USD Exchange Rate Soft but Forecasts Suggest Some Near-Term Strength Still Likely

EUR/USD starts the new month with a heavy tone but the potential for an extension of last week's advance remains alive over coming days.

The EUR/USD exchange rate trades at 1.0974 at the start of the new month as the currency pair drifts off the week's open at 1.0991. 

The fall is relatively minor when we consider EUR/USD surged higher at the end of last week, going from 1.0900 up to just under 1.1000 in a single session.

The EUR/USD rally was driven largely by Dollar weakness triggered by the release of some stronger-than-forecast GDP data - which confirms the reaction to have been a surprising one.

The resultant strong upswing in EUR/USD may well be the mark of the start of a new mini-trend higher as new uptrends often start with a rapid lift-off.

The MACD indicator has just crossed its signal line providing a bullish confirmatory signal.

To confirm a continuation higher, however, I would ideally wish to see a break above 1.1025, targeting the 1.1100 level to the upside.

The downtrend could also continue but would require a break below 1.0850 for confirmation of more downside to an initial target at 1.0800.

"The level at USD 1.10 withstood a first test, The intraday high was marked at 1.0995. The higher level could not be sustained for long, however, and has been currently driven back to the region of 1.0960. Nonetheless, against the backdrop of rising oscillators and the turning MACD, potential for a further recovery initially looks possible," says Ralf Umlauf at Helaba Research in Frankfurt.

With its intact sell signal, however, the DMI points to continued medium-term risks says Umlauf who sees recovery potential currently up to the 38.2% retracement at 1.1048.

Helaba's favoured trading range is between 1.0935 and 1.1048.

Fading Support for Dollar from Fed Expectations

Given December hike at the Federal Reserve has now been priced in it’s unlikely the Dollar will rise much higher from that driver alone in the week ahead.

A steeper trajectory for interest rates in the future, rather than the market's current view that they will stay 'lower for longer', however, could propel the Dollar higher.

We think there is an increased possibility of a surprise rate hike at the Fed meeting on Wednesday, October 2 despite the proximity of the presidential elections which there is no hard evidence is a preventative factor.

This contrasts with the markets view of the possibility of the opposite response from the European Central Bank (ECB), who they see as more likely to increase stimulus, which would weaken the single currency.

We see the possibility, however, of markets changing that negative view of the Euro, which would help it rebound.

Nevertheless, the Euro is also subject to downside pressure from political risks in the run-up to an election-intensive year for the Eurozone and increasing support for anti-EU parties across the area.

Data to Watch for the Euro

The preliminary estimate for October CPI on Monday, October 31, met expectations and was therefore unable to give the Euro a lift.

Eurozone CPI data showed a 0.5% rise year-on-year, in October, on Monday, reaching a two and a half year high in the process.

The result was in line with analysts’ expectations and higher than the 0.4% of the previous month of September.

Core CPI rose by 0.8% which was also in line with estimates and the same as the previous result.

Wednesday, November 2 is set to be another important day for the Euro as the final estimate for Manufacturing PMI in October is released at 11.00 (LT).

On Thursday, also at 11.00, the Unemployment Rate in the Eurozone will be released, with a drop of a basis point to 10.0% expected.

At 10.00 (LT) on Friday Services PMI for the Eurozone is released, with no change from the preliminary estimate of 53.5 forecast.

Data to Watch for the Dollar

The first major release of the week is ISM Manufacturing in October, at 15.00 (LT) on Tuesday, which is forecast to come out at 51.7 from 51.5 previously.

This and Non-Farm payrolls at the end of the week are expected to be “constructive” and to, “confirm solid growth fundamentals are in place,” say analysts at TD Securities.

"Attention will initially centre again today on the ISM index for the manufacturing sector. As indications from regional industrial surveys were encouraging, an uptick in the ISM index looks possible. Relative to the consensus forecast, we even see scope for a sligh upside surprise," says Helaba's Umlauf.

This is followed by the Federal Reserve Interest Rate Decision (FOMC) on Wednesday at 19.00 (LT), with only a very low 7.2% probability of a rise being agreed at the meeting, mainly due to the proximity of the US presidential election.

We think the market is being complacent and that recent strong GDP data could have increased the odds of a surprise rate hike at the November meeting.

If not then the Fed is highly likely to at least ‘pave the way’ in its statement, for a hike in December which markets are currently pricing in as 78% probable.

ISM Non-Manufacturing PMI for October is set to be released on Thursday at 15.00 (LT), and is expected to show a dip to 56.0 from 57.1 previously.

Another big release at the end of the week is Non-Farm Payrolls at 13.30 (LT) on Friday, November 4 , with analysts expecting a rise of 175k in October from 156k previously.

The Unemployment Rate, released at the same time, is forecast to fall to 4.9% from 5.0% in October.