EUR/USD Rate Forecast for the Week Ahead: Weakness to be Limited
The Euro to Dollar exchange rate has fallen – remarkably - even after the Euro-supportive candidate, Emmanuelle Macron, won the French presidential election.
Analysts are saying that it is an example of ‘buy the rumour’ and ‘sell the fact’.
"From a EUR perspective, the old adage "buy the rumour, sell the fact" played out yesterday post the French election outcome. Interestingly, 2-year German yields have actually pushed higher showing underlying confidence and some expectation that the ECB will start to alter their forward guidance in the coming months, we believe in June," says analyst Robin Wikin at Lloyds Bank.
EUR/USD had risen above the March highs last week establishing a sequence of peaks and troughs higher and suggesting the medium-term trend might be reversing.
The lacklustre start in EUR/USD seen at the start of the new week however seems to be suggesting a period of consolidation may follow before the market decided whether to bid the currency up and further – probably based on the utterances of the European Central Bank.
From a technical perspective, there is compelling evidence for both bullish and bearish points of view.
For example, the gap formed three weeks ago still remains open but is highly likely to close soon – it is not for nothing that the Japanese call market gaps “windows”. This would suggest more downside on the horizon.
Despite that, the establishment of a new sequence of higher highs, the break above the trendline and the MACD moving a touch above zero all provide compelling bullish indications too.
Ultimately I believe the short-term trend remains intact and is likely to continue higher, with a break above the 1.1100 leading to a move up to the next plausible target at 1.1200.
"We still view pullbacks in the EUR as corrective for a move back towards the high region of the range we have been trapped in since March 2015. Industrial production out of Germany this morning was a little soft and that has put further near-term pressure on the EUR," says Wilkin.
Data, Events to Watch for the Euro
The French presidential election resulted in a landslide victory for the independent centrist candidate Emmanuelle Macron but it did not translate into a substantial upside move for the Euro as many had expected. Instead EUR/USD was barely changed after the news of his victory, most of the upside having already been ‘priced in’ after his convincing first round win.
Instead, EUR/USD was barely changed after the news of his victory, most of the upside having already been ‘priced in’ after his convincing first round win.
Macron said he would be seeking to ‘unify’ Europe – a view which sees him endorse the European project, and has had some commentators opine that he could make Brexit negotiations harder for the UK. This has not, however, weighed on Sterling so far.
The Euro’s other main release this week is Industrial Production, out on Friday, May 12 at 10.00 GMT, which is likely to show a 0.3% rise in March from -0.3% previously.
Data for the Dollar
The major economic data release for the Dollar in the week ahead is Inflation (CPI) in April, out on Friday 12 at 13.30 GMT.
Higher inflation will drive up the Dollar as it will thicken expectations of a June interest rate hike by the Federal Reserve and currencies generally rise as a rule when central bank’s hike rates.
Headline CPI is expected to rise 2.2% from the previous year and 0.2% from March; Core CPI is expected to rise 0.2% by the market but only 0.1% by TD Securities.
Out at the same time is US Retail Sales, which is expected to rise 0.6% in April compared to -0.2% in March. They are also important as they are a measure of consumption, the major driving force in the US economy. Higher readings mean stronger Dollar.
Canadian-based bank TD Securities are slightly less optimistic, saying they think Retail Sales could rise by a more muted 0.4%.
“We look for retail sales to rise 0.4% in April, slightly below the market consensus as we expect some pullback from the positive late-Easter effect on March sales,” said TD Securities.
Retail Sales will be key as a measure of economic growth, according to BK Asset Management’s Kathy Lien.
“While job growth was good, the real question is whether it translates into spending. Consumer consumption has been very weak but according to the most recent FOMC statement, fundamentals underlying consumption growth remain solid,” said Lien.
“Commentary from Federal Reserve’s Dudley and Harker, who are both voting members of the FOMC – the Fed’s interest rate-setting board – could also impact on the way the Dollar trades as they “represent opposite sides of the dove-hawk spectrum,” said BK’s Lien.
