Euro-to-Dollar Rate Forecast for the Week Ahead

The Euro continues rising against the US Dollar but we note multiple red lights on the charts which suggest the move is overextended.

Although the Euro-to-Dollar exchange rate is looking decidedly overextended there's an old saying in financial markets that "the trend is your friend until the bend at the end," and nowhere does that seem more apt than is the case with this pair.

EUR/USD has appreciated significantly since the 1.0432 lows of January 2017 and is now trading at 1.2456 just over a year later, which whilst not bad going, our studies of some key technical indicators do warn of an overextension. 

Indeed, there are a number of signs which should inject a does of caution into even the most exhuberant of bulls: the most concerning of these is on the monthly chart below which shows the exchange rate interacting with the 200-month moving average (MA).

Large moving averages such as the 200-month MA are a major impediment to further gains as they act as dynamic levels of support and resistance where prices often stall, pull-back or completely reverse - and you can't get much bigger than the 200-month, thus some caution is in order.

The weekly chart is showing a compelling continuation configuration but sadly the ADX indicator, which measures how strongly an asset is trending, is now above its sweet-spot of between 20-30, for indicating a high probability of the configuration leading to a successful continuation higher.

Added to this, the daily chart is showing ADX at over 50, which is an overbought signal - so all in all there is growing evidence the uptrend may be compromised.

Yet despite all this, one important component is missing from ticking all the boxes of a bearish reversal, and that is actual weakness in price action itself.

The exchange rate keeps on rising despite all the evidence to the contrary and so we continue to forecast higher prices : the trend is indeed your friend as they say - and it remains 'up'.

In fact, the exchange rate ignored the shooting star candlestick posted at the January 25 highs and did not weaken as would normally be expected, which is a bullish sign, if anything.

The pair has gone sideways instead and there is now a risk that EUR/USD could break to new highs, and a move above the 1.2537, confirming a continuation up to 1.2600.

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Data and Events for the Euro

Eurozone data starts with retail sales out on Monday at 10.00 GMT, with analysts forecasting a 1.9% rise in December from a year ago, and a -1.0% decline compared with the previous month.

There's very little Eurozone data in the coming week to threaten the currency's positive outlook and for that reason we expect Euro to continue to outperform other major currencies (barring any surprises from central banks)," says BK Asset Managment Managing Director Kathy Lien.

Monday also sees a speech from European Central Bank (ECB) president Mario Draghi at 16.00, although his message is unlikely to have changed materially from that at the recent ECB rate meeting press conference.

Finally, on Thursday at 9.00, the ECB releases its Economic Bulletin, which will probably officially back up the current positive outlook for the region.

Fears that the Euro was getting overpriced - which poses as a headwind to the Eurozone's economic expansion - appear to have been misplaced removing another obstacle to further Euro appreciation.

"The economy is recovering and the effect of a strong Euro on inflation has been limited. As a result, Eurozone policymakers have become more tolerant of the rising currency and more eager to end asset purchases," says Lien.

Data and events for the Dollar

The Dollar roared higher last week after the release of positive employment and wage data on Friday and the market will be expecting more of the same in the week ahead.

Monday sees the release of the Non-Manufacturing ISM at 15.00 GMT, which is based on a survey conducted by the Institute of Supply Managers (ISM) of their members.

The ISM is deemed as a key source of knowledge for gauging the health of a given sector of the economy, in this case, Non-Manufacturing.

A score of above 50 indicates expansion of the sector and below contraction.

Monday's data is expected to show a slight decline to 57.2 from 57.3 previously (December).

Also of interest is the 'New Orders' component of the ISM report which is seen as a forward indicator for activity - it came out at 54.3 previously.

The other main release for the Dollar is the trade balance, out at 13.30 GMT on Tuesday, February 6, which is forecast to show the deficit widen to -52.0bn in December from -50.5bn previously.

(Image courtesy of tradingeconomics.com)

The trade balance can impact on the Dollar because it suggests supply and demand dynamics in trade.

A rise in exports and a consequent narrowing of the trade deficit is good for the Dollar as it suggests demand for Dollars from buyers of US exports outweighs supply from US importers buying foreign imports - and vice versa for a fall in exports.

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