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

Modified: Tuesday, 03 April 2018 06:32 BST

- EUR/USD consolidating in an uptrend, potential for a break higher

- Eurozone inflation data is the main event for the Euro in the week ahead

- The main release for the Dollar is Non-Farm-Payrolls and Earnings data

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The Euro-to-Dollar rate is unfolding in a sideways, range-bound consolidation; once it has finished it is expected to breakout higher.

A move above the 1.2555, January 25 highs, would probably confirm a continuation up to the next target at 1.2625, at the level of the major trendline drawn from the 2008 highs (see chart below).

The monthly chart below provides us with some insight as to why the pair is stuck in a range at the current level: it is because the exchange rate has met the 200-month moving average (MA) at 1.2483 and retracted.

Large moving averages present obstacles to price action, which often stalls, rebounds or even reverses after touching them.

Usually, more trading goes on around major MA's as they are popular indicators amongst investors.

Given the uptrend is dominant we think the bias is for it to extend higher and eventually break above the MA.

We would need to see a re-break above the 1.2556 highs for confirmation. Such a break would also soon run into further resistance at the major trendline and our next upside target is at 1.2625.

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Data and Events to Watch for the Euro

Eurozone inflation data is the main release for the Euro in the week ahead, when it is released at 10.00 GMT on Wednesday, April 4.

CPI is forecast to show a faster 1.4% rise in March compared to a year ago (YoY) when it increased by only 1.1%.

Core CPI is forecast to increase by 1.1% from 1.0% YoY.

HICP is the harmonised version which is calculated using standard methods adopted throughout the EU.

Higher inflation is a key requirement for the European Central Bank (ECB) to end its stimulus programme and start raising interest rates, the ECB's inflation target is just below 2.0%. Recall, the Euro has risen steadily endured a strong uptrend in 2017 as markets bet the ECB was starting to exit its stimulus programme of quantitative easing at some point in 2018.

If inflation continues to rise towards the 2.0% target, the ECB should make an exit from its quantitative easing programme in late 2018, and raise rates in 2019.

While the 'timing effects' of Easter may distort this week's figure, they have been taken into account in modeling the estimates says Martin Enlund chief strategist at Nordea Markets who adds, "what might not be properly accounted for," however, "are the effects from the past year’s gains of the trade-weighted EUR, which if anything suggests downside risks to Euro-area inflation also in coming months (vs e.g. ECB’s forecasts)."

The Euro-zone unemployment rate is out at the same time as the CPI and is forecast to slide to 8.5% from 8.6% previously.

Data and events to watch for the US Dollar

The main release for the US Dollar in the week ahead is probably Non-Farm Payrolls (NFPs), out on Friday, April 6 at 13.30 GMT.

NFP's are expected to continue showing relatively robust strength and rising by 195k in March compared to the 313k registered in February. Anything at or over 200k is considered very good.

Last week's result was not attended by strength for the Dollar purely because Average Earnings data, released at the same time as NFP's, was disappointing. Wages are more important than NFPs now since they are a more direct indicator of inflationary pressures. Higher inflation leads to higher interest rates which lead to a stronger currency.

Also of importance to the Dollar in the week ahead is all the commentary from Federal Reserve (Fed) officials, including Kashkari (Monday 23.00, Tuesday 14.30), Brainard (Tuesday 21.30), Bullard (Wednesday 14.45), Mester (Wednesday 16.00), Bostic (Thursday 18.00) and Chairman Powell (Friday 18.30).

Analysts will be scrutinizing what they say for indications of their stance on interest rates since the Fed is in charge of putting up interest rates.

One major release for the Dollar which is already out after it was released this afternoon was the Manufacturing ISM, a survey-based indicator of activity in both manufacturing and non-manufacturing sectors of the economy (the non-manufacturing ISM is out on Wednesday), compiled by the Institute of Supply Managers.

Manufacturing ISM rose to 59.3 in March, which was below the forecast of 60.1 and the previous result of 60.8 for February.

ISM Non-Manufacturing is forecast to reveal a slowdown to 59.2 from 59.5 when it is released on Wednesday at 15.00.

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