Euro-to-Dollar Rate Forecast for the Week Ahead

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The Euro-to-Dollar rate trades sideways at the start of the new week, with the US Fed poised to raise interest rates and March manufacturing and services data out for both regions.

Our latest technical studies on the EUR/USD pair shows the longer-term uptrend to ultimately look intact despite the pair being rangebound action in the near-term, and our forecast remains broadly bullish, the same as last week's predictions but with some price alterations.

This sideways-orientated range will probably continue to unfold in the short-term but eventually breakout higher in line with the broader trend.

The problem for Euro bulls is that the 200-month moving average (MA) is situated at the range highs and is resisting upside (see below).

Large moving averages tend to act as formidable obstacles on charts because many investors use them as their primary decision-making tools and this increases selling pressure around them.

Sometimes wholesale reversals occur at the level of MAs but at the moment we don't see this happening at the 200-month MA.

The pull-back is probably only temporary - notice how a similar pull-back occurred when the pair touched the 50-month MA (red line) back in the autumn of 2017 but then continued up.

A break above 1.2575 would provide bullish confirmation of a full clearance of the MA. it would probably see the exchange rate rise up to a target at 1.2680 just below the R2 monthly pivot - another barrier to further upside.

Pivots are calculated using the open, high, close, and low of the previous month and provide traders which a short-hand reference for gauging the trend. They are also levels of support and resistance in themselves which attract a lot of short-term selling from traders looking to ride the volatility around them.

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Data and Events to Watch for the US Dollar

The main event in the coming week is the Federal Reserve policy meeting on Wednesday, March 21, at 18.00 GMT, where the officials on the Federal Open Market Committee (FOMC) are expected to raise the target range for the federal funds rate by 25bps to 1.50‑1.75%.

"We also see a risk the FOMC raises its median federal funds rate projection for 2018 to include four instead of three hikes," says Elias Haddad at CBA. "This would bode well for the USD in the near‑term."

CBA expect the Fed to reiterate that future interest rate increases will be data dependent and gradual and expect the FOMC to increase its US GDP growth forecasts for 2019 and 2020 modestly to reflect increased government infrastructure spending.

Also of importance to the Dollar will be the Fed 'dot-plot' which is a diagram which visualises each individual official's changing expectations of where they expect the Fed's base interest rate to be in the future. Currently the Fed's dot-plot shows Fed officials expect, on average, that they will undertake three rate hikes in 2018, but some analysts now think there is a material chance the dot-plot being revised up to reflect four hikes instead.

"With the Fed expecting unemployment for fall to 3.9% by the end of 2018, the risk of overheating has become high. Fed “dots” shifting upwards is highly probable," says a preview from Swissquote Bank. If correct, this would likely provide a further boost for the US Dollar.

There are of course risks this upgrade does not transpire and the disappointment could manifest itself in a weaker Dollar.

The tone struck about the economy's prospects will also be important; watch for any views pertaining to wage growth and inflation in particular. We have noted of late the Dollar tends to react more to US wage data thanto employment data, and the Fed's views on the matter could well be taken as hints for future monetary policy moves.

Data and Events to Watch for the Euro

The main economic event in the week ahead for the Euro is probably the release of March IHS Markit manufacturing and services PMI data on Thursday at 8.30 GMT.

PMI stands for Purchasing Manager Index and is a gauge based on survey responses from purchasing managers in companies, who have a pivotal role which gives them unique insight into the state of the sector. Taken together, the responses to the PMI survey provide an important indication of growth, both in major industry sectors and the economy in general.

"We continue to judge that European/German PMIs look vulnerable from the current high levels, and next week will give us a string of new clues on whether that story holds. Judging from the financial market developments over the last month, the Composite Euro Area PMI (Thursday) could drop as much as 1 index-point again this month," says Nordea Bank analyst Martin Englund.

Enlund's forecast of an index-point fall is based on Nordea's predictive model for PMIs using Dax yields (see below).

The general consensus is that Manufacturing will slow to 58.1 from 58.6 and Services to 56.0 from 56.2.

Eurozone PMIs peaked at a very high level (above 60) in late 2017 and have since been drifting lower - clearly, the consensus thinks the deterioration will continue, and this may impact negatively on the Euro, especially if the decline is deeper-than-expected.

Another survey-based early warning indicator for the economy is the ZEW economic sentiment gauge for March, scheduled for release at 10.00 on Tuesday, March 20.

The ZEW index is forecast to fall slightly to 28.1 from 29.3.

Eurozone Consumer Confidence for March is out at 10.00 on Tuesday too and is forecast to come out at 0.0 in March from 0.1 previously. Given historic results, this would not be a disastrous result.

(Images courtesy of Tradingeconomics.com)

From a political perspective the reopening of the Italian parliament after the elections on Friday, March 23, will highlight political risks in the region as it will start the process of coalition talks to form the next government. There is still a risk of an anti-EU coalition forming between the Northern League and 5 Star which could make further integration of Europe problematic and weigh on the Euro, although talks are likely to last for some time before a final agreement has been made.

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.