Euro-to-Dollar Rate's Forecast for the Week Ahead

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A bearish chart pattern suggests an eventful week ahead for the EUR/USD pair, although more downside is not a certainty.

The EUR/USD exchange rate endured a volatile previous week, moving lower and reaching the mid 1.21s at the beginning but then rebounding and ending the week back above the 1.2300 level.

The rebound came as a surprise from a technical perspective as the pair had looked like it had formed what is known as a double-top bearish reversal pattern(see chart below), however, if so it would have been expected to extend lower after the break below the pattern's neckline at the 1.2200 February 9 lows.

Double tops have an 'M'-shaped appearance and bearish implications for the pair, especially if the intervening trough low is breached - or the 'neckline' as it is known in technical jargon.

Usually, when the neckline is broken the pair sells off sharply, moving down about the same distance as the height of the pattern.

Strangely, in this case, this did not happen, as although the neckline was broken, the pair failed to extend very far down, reaching lows of only 1.2151, before it rebounded and rose up to Friday's close above 1.23.

This explanation is that the 50-day moving average (MA) situated just below the neckline at 1.2237 probably prevented a deeper sell-off as major moving averages tend to act as obstacles to the dominant trend.

The exchange rate often stalls, bounces or reverses at MA's, and this characteristic attracts technical traders who seek to capitalize on the bounce, which actually enhances the effect.

Yet despite the rebound, the bearish pattern may still be valid and if we see a break below the 1.2150 lows it will confirm a decisive break below the 50-day to a downside target at 1.1990 initially followed by 1.1870.

The 1.1870 target is the height of the double top extrapolated lower by the golden ratio, an ancient mathematical constant used to explain proportions in natural phenomena and financial markets.

Data and Events to Watch for the Euro

The Euro will probably spend the first half of the week processing the political news from Sunday after the Italian general election and the German SPD party's vote to form a 'grand-coalition' with Angela Merkel's CDU party.

As we note here, the implications for the Euro could be positive as the decision by the SPD to join Angela Merkel's CDU in government puts an end to months of political uncertainty in Europe's largest economy and puts the European integration project back on track.

Italian election results will be known early in the new week and by all accounts it appears as though a coalition government will be the most likely outcome.

"It seems virtually inevitable that Sunday’s Italian election will result in no single bloc (let alone party) achieving a majority. Markets’ favoured outturn would probably be a ‘Grand Coalition’ between the larger centrist forces, notably the center-left PD and center-right Forza Italia," says Investec Economics analyst Victoria Clarke.

In Germany, Clarke is - similarly - of the opinion that the SPD will probably vote to form a grand coalition with CDU, which would also be favourable for the Euro.

Thus overall there is a chance of an upside surge for the single currency on easing political risk at the beginning of the week.

The other main event of the week for the Euro is the European Central Bank (ECB) policy meeting on Thursday at 12.45 GMT.

No change in monetary policy is likely but analysts will be looking for tweaks in the language of the statement for signs that the ECB is moving closer to letting go of stimulus. Any signs that this is the case, are likely to be positive for the Euro since stimulus via quantitative easing and perpetually low-interest rates dampen demand for the currency from foreign investors.

"The key event will be Thursday’s ECB Governing Council (GC) meeting. No change in its stance is likely. But we suspect that a more robust economic outlook will put the GC under pressure to remove the easing bias on its QE policy i.e. no longer state that its stands ready to step up or extend the programme if necessary," says Investec analyst Victoria Clarke.

From a hard data perspective, Eurozone January retail sales data kicks off the week, on Monday, and is forecast to show a 0.3% rise compared to the -1.1% fall in December, when it is released at 10.00.

Other hard data is unlikely to be as important, as both the purchasing manager indices for February and the Q4 GDP release, are second estimates and therefore unlikely to diverge substantially from the initial flash releases.

Data and Events to Watch for the Dollar 

US labour market data will be the key focus for markets in the week ahead, with Non-Farm Payrolls data out on Friday at 13.30 GMT and wage data at the same time. 

Wage data may be more important for the Dollar as it is a more primary driver of inflation and, therefore, interest rates.

Expectations are currently for NFPs to show a rise of 204k jobs in February from 200k in the previous month, and for earnings to have risen by 0.3% in February.

January's strong earnings data led to a rally in the Dollar after it sparked concerns about accelerated pay inflation, and there is a possibility of a similar reaction from the data out on Friday.  

The Dollar rose on the back of higher inflation expectations because it tends to lead to higher interest rates which is a draw to foreign capital.

There is also some important data out on Monday for the Dollar, including Services Purchasing Manager Indices data (PMI) which is forecast to show a rise in activity in the sector to 55.9 in February from 53.3 in the previous month, when it is released at 14.45.

Data will also be released from the Institute of Supply Managers (ISM) for the non-manufacturing sector at 15.00 on Monday and is forecast to show a slight slowdown to 58.9 from 59.9 in February.

Both the ISM and the PMI indices are compiled from survey responses from key procurement managers in the sector in question and are regarded as reliable leading indicators for the economy.

A positive result would, therefore, boost the Dollar as it would raise future interest rate expectations. 

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