For Euro / Dollar Rate, More Strength Looms

Modified: Monday, 23 January 2017 07:50 GMT

The Euro to Dollar exchange rate (EUR/USD) has the potential to rise this week if markets start to pull-back following Donald Trump’s inauguration speech.

Empirical evidence shows the Dollar weakens till mid-March 90% of the time following the President’s inaugural address.

In this vein, our technical forecast is bullish for the Euro and suggests a rise in EUR/USD.

The short-term uptrend is now established and expected to extend.

A break above the 1.0719 highs would probably confirm a continuation up to the next major round-number at 1.0800.

The MACD is now above its zero-line, further corroborating a bullish outlook.

The one proviso to our constructive technical outlook is the wedge-like pattern the exchange rate has formed on the four-hour time-interval chart.

The wedge could be interpreted as a bearish sign, with a break below the 1.0590 lows signaling a reversal of the short-term trend and a significant downside breakout.

The Longer-Term Trend Favours the Dollar

Despite the recent advance of the Euro, it is worth favouring that this strength runs counter to the dominant long-term trend that favours the Dollar.

"The currency markets remain in a random two-way rotational phase and continue to correct against the primary trend, which continues to favour the Dollar. The Dollar index moved below the 50-day MA, but price remains well above its 200-day MA, and the trend is up. The RSI is flirting with bull market support at the 40 level," says Phil Seaton at LS Trader.

Seaton observes that the recent corrective rally in EUR/USD has been on declining volume and volatility, which is characteristic of a correction and not a new trend.

"Price is finding resistance in the region of the 50-day MA and remains below the 38.2% retracement of the decline from the November 2016 spike high. That price level is 1.0751. Friday’s close was 1.0730. Based on the current technical picture displayed by the charts, I expect resistance will be found somewhere between the 38.2 and 50% (1.0868) retracement levels of that decline before the market turns lower once more," says Seaton.

The Euro this Week

Manufacturing and Services PMI’s are out on Monday, January 23 at 9.00, and are expected to show a rise in Services to 53.9 from 53.7 and in Manufacturing to 54.8 from 54.9 previously.

"This week’s flash PMIs are worth watching to see whether the momentum from late 2016 has continued into Q1 2017. Q4 saw particularly strong survey data, and so far early signs point to that continuing. Our economists look for the PMIs to hold at the recent highs," says Elsa Lignos at RBC Capital Markets.

Wednesday, January 25, sees the release of the German Ifo Sentiment Survey, which is forecast to come out at 111.2 in January (Business Climate Survey)– a two basis point rise from the previous, November, result.

Italy’s Constitutional Court will on Tuesday rule on the country's electoral law.

The Court is expected to cancel the part of the law that gives the winning party a bonus allocation of seats, at which point Parliament will have to start working on a new law.

"The Court’s instructions on why it rules parts of the law as illegal will help to dictate when new Italian elections might take place," says a note from TD Securities.

Any hint of fresh elections will only increase the political risk premium in the Euro during 2017.

The Dollar this Week

Analysts will be attuned to the next moves by the new US President as we move through the coming week and politics could therefore overshadow data.

That said, markets are still interested in when the US Federal Reserve will next raise interest rates, and as such, data will still be watched.

The Dollar’s most important release is on Friday, January 27 with fourth quarter GDP out at 08.30, which is forecast to rise 2.2% from 3.5% previously.

Advance estimate – the first out of three – 3.5% in nQ3, which was a big improvement. Consumer the driving force. Exports rose 10%. Don’t expect Q4 to be as strong but overall we expect growth to be 1.7% in 2016.

The Dollar’s week starts with Existing Home Sales in December, on Tuesday, January 24 at 10.00 GMT. It is expected to rise by 5.54m, from 5.61m previously.

Also of importance is the release of the preliminary reading for Manufacturing PMI in January, out at 9.45 GMT, which is forecast to show a rise of one basis point to 54.4 from 54.3 previously.

New Home Sales in December, out at 10.00, on Thursday, January 26 are forecast to rise by 584k from 592k previously.

This represents a -1.0% fall from the previous result.

Core Durable Goods Orders month-on-month in December are forecast to rise by 0.5% from 0.6% previously. These are also out at 8.30.

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