Euro-to-Dollar Rate Forecast for the Week Ahead: Short-Term Downtrend seen Extending
- EUR/USD is showing mixed short-term indicators
- A central focus for the Euro in the week ahead will be the outlook for ECB policy
- The Dollar could see traction from inflation data, Fed minutes mid-week
© Andrey Popov, Adobe Stock
One Euro buys 1.2271 US Dollars at the time of writing, well below the month's high at 1.2358, but an improvement on last week's low at 1.2224.
The Euro managed to end Friday on a high against the Dollar as a combination of below-expectation US labour market data and escalating trade war concerns weighed on the American currency.
US payrolls only added a lacklustre 103k jobs in March compared to a long-run average of about 200k and well below forecasts of 180k.
The trade war with China ratcheted up a notch after president Trump issued plans to slap tariffs on another 100bn of Chinese imports, and it was only due to the diplomatic efforts of his advisors that the markets regained some poise leading into the weekend.
On a technical basis, the Euro-to-Dollar exchange rate continues unfolding in a sideways, range, with a ceiling in the 1.2500 area and a floor at around 1.2150, which it has been moving in for pretty much the whole year.
At the moment it is in a down cycle and is falling within the range, and we expect a continuation of the current short-term downtrend in the immediate future, probably to as low as the 1.2150 floor.
Confirmation of more downside would come from a break below Friday's 1.2215 lows.
The bias is not straightforwardly bearish, however, and on the daily chart, there are signs of a possible bullish reversal of the short-term trend, especially in the form of a possible two-bar reversal which may have formed last Thursday and Friday.
Two-bar reversals occur when prices are in a downtrend and a relatively long down-bar forms which is followed immediately by a relatively long up-bar of about the same length. The pattern is highlighted in a box on the chart below.
Two bar reversals are quite bullish and this one could be signaling the start of a more uptrending phase for EUR/USD, however, one concern is that the pattern is not very big - ideally, the bars should be longer - and this weakens the signal.
Nevertheless, there is a possibility of a turnaround for EUR/USD in the short-term and a move back up to the range highs.
Beyond the very short-term the pair may breakout higher, given the prior trend for the pair was up, however it is limited to a move up to the major trendline situated at 1.2625 at which point further gains are likely to be difficult to achieve.
The situation is further confused by the location of the 200-month moving average at the 1.2483.
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.
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.
Data and Events to Watch for the Euro
It looks to be rather a quiet week for the Euro, with the main release probably in the guise of the European Central Bank's (ECB's) March meeting minutes out at 12.30 GMT on Thursday, April 12.
Like the BOE (Bank of England) the ECB set interest rates and are thus instrumental in guiding the exchange rate. In the case of the ECB its all about when they think the 'patient' is ready to be taken off the drip of monetary stimulus: the ECB is one of the few central banks to still operate a QE programme, around which the big debate is when it will end the programme and start raising interest rates.
We see little chance of the minutes impacting substantially on the outlook for the Euro, however, as the landscape has changed a lot since the meeting at the start of March, and officials may already be less optimistic due to a trend for releases to show a slowdown.
Thus even an upbeat minutes may be interpreted as of historic interest only.
Of perhaps more import may be fresh communication from ECB members in the week ahead, including vice-president of the council
Vitor Constancio at 14.00 on Monday, ECB's Praet at 17.45, president Draghi himself on Wednesday at 12.00 and Bundesbank's Wiedmann on Thursday at 17.00 - and what may be interesting will be to see if hawks like Wiedmann are moderating their stance at all (unlikely) in light of the poor run of data.
Other data from the Euro-area includes the Trade Balance for February, out at 10.00 on Friday, April 14.
Data and Events to Watch for the Dollar
The big day for US data which is likely to impact most on the US Dollar this week is Wednesday, April 11, when, first inflation data at 13.30 GMT, and then the minutes of the US Federal Reserve at 19.00, are released.
Inflation is forecast to rise 0.0% in March compared to the level it was at in February, and Core Inflation, which leaves out volatile food and fuel inputs, by 0.2%.
Compared to the previous year, or year-on-year (yoy) as it is known, the inflation rate is expected to show a rise of 2.4% and 2.2% respectively.
These increases are in line with current market expectations of the Fed raising interest rates by a further 0.25% to 2.0% in the summer.
Concerning the Fed, the release of the minutes on Wednesday are expected by strategists with Barclays to be supportive of the Dollar; "Wednesday's FOMC minutes may read hawkish, in line with revisions to the dot plot, especially against Chairman Powell's dismissal of those changes in the press conference," say Barclays in a strategy note that sees EUR/USD declining this week.
The US Dollar fell across the board after the US Federal Reserve raised interest rates in March but signalled they were in no rush to hasten the pace at which they raise interest rates in the future. However, the much-watched ‘dot plot’ graph of FOMC participants’ interest rate expectations - contained in the latest set of economic forecasts - shows that the majority think this policy will require two further interest rate rises in 2018.
Barclays reckon a hawkish Fed / bearish ECB contrast should set up further declines in the Euro-to-Dollar exchange rate.
We however do not expect any upside surprises given the status quo stance adopted by the Fed's Chairman Jerome Powell in his speech on Friday which suggested a 'steady as she goes' attitude. The Fed is on the frontline when it comes to the economy so if there were any risks to the data showing an extreme overshoot higher or lower Powell would have been expected to know about before the rest of us and to have dropped hints as such on Friday. The fact he didn't speaks volumes.
Most of the analysis out there is about the escalating trade war and whether it will get any worse in the coming week. The ball is now in China's court so there is the possibility of further retaliation given the US's move to increase the scope of tariffs to include 100bn more goods from China, on Thursday, on top of the existing 50bn.
Scandinavian lender Nordea Bank notes how the S&P 500 is at a make or break level now, in the form of the 200-day moving average, a key line in the sand for everyone from big Wall Street fund managers to the guy next door who likes to trade his pension portfolio part-time.
A further escalation in the trade tit-for-tat could be just the catalyst required to send stocks down another notch and lead to a break and close below the 200-day, and if that happens there's likely to be much blood spilled and deep follow-through declines.
Of course, how this will impact on the Dollar is not exactly clear - the usual relationship is that what is bad for stocks is good for the Dollar because when all is said and done the US Dollar is still a safe-haven currency but it's not by any means a straight line correlation.
The week ended with a small swing higher in stocks after senior White House advisor Larry Kudlow sought to take the heat out of the trade war debate by saying he didn't expect most of the tariffs to materialise in reality, but Nordea Bank's Andreas Steno Larsen cautions against taking advisor's comment's too seriously as Trump is very much 'captain of his ship' when it comes to trade policy.
"We advise against taking too much comfort in softer trade tones from Trump’s economic advisers, including the newly appointed Larry Kudlow (as the market did earlier this week). Ultimately, Trump seems to be personally in charge of these trade efforts," says Larsen.
Expectations that Trump may shy away from a trade war because it will have a negative impact on the S&P 500 which he appears to have "internalised" in the words of the Nordea analyst, should also be taken lightly - Trump probably has the stomach for a trade war.
"Recent communication from the White House indicates that Trump is increasingly willing to see through a stock market correction, as the trade measures are a “longer-term thing”," says Larsen.
As far as the chances of an escalation go, if it's going to happen, it may well happen next week with a salvo from China.
"China may or may not issue their own threat of enhanced tariffs next week, which would add pressure on the dollar but serious trouble comes when these words turn into action," says Kathy Lien, Managing Director of BK Asset Managment in a note on Friday.
Another potentially significant release for the Dollar in the week ahead is the release of the March Fed meeting minutes on Wednesday, however, in light of Chairman Powell's speech in which he endorsed a steady trajectory we doubt the minutes will deviate much from him, so there, is perhaps only a very outside chance of a surprise.
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