The Euro-to-Dollar Rate's Week Ahead: Just a Corrective Bounce

- Tentative hints the hefty sell-off might be fading
- Employment and wage data dominates the calendar for the Pound
- Retail sales will be eyed by Dollar traders

Since mid-April the Euro-to-Dollar exchange rate has been in decline, after the highs of a sideways-orientated range near 1.24 were rejected and a significant turnaround in the U.S. Dollar's fortunes occurred.

Indeed, the key driver in EUR/USD's move back below 1.20 is the Dollar which is easily the best performing major in the mid-April to early-May period.

We are however watching a recent consolidate move in the exchange rate which has occurred largely thanks to the Dollar's strong period of appreciation easing. Make no mistake, the Dollar remains in control of what happens next.

"The market has staged a near-term rebound. We are waiting to see if this becomes more meaningful," says Robin Wilkin, a technical strategist with Lloyds Bank Commercial Banking. "Our bias is that this is just another corrective bounce with 1.1950 and then 1.2025 the main resistance levels. While they hold, we still look for another run down towards more important medium-term support in the 1.16-1.15 region, before a rebound back defining the bottom of a medium-term range."

Wilkin says a rally back through those resistance levels would suggest that low is already in place.

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USD: What to Watch

For the Dollar, it appears a newfound focus by markets on moves in the yields on US Treasury bonds are key.

The 10-year bond yield touching the 3% marker appears to have conincided with something of a regime shift in global financial markets; one that favoured the Dollar.

Should yields continue to move higher, the Dollar might do too. And, behind the rise in US Treasury yields and the Dollar is the continued robust performance of the US economy and expectations for yet more interest rate rises at the US Federal Reserve.

Tuesday, May 15

US retail sales numbers are out at 13:30 B.S.T. and markets will be looking for signs that the all-important American consumer is opening the wallet, something that would suggest economic expansion is likely to remain robust.

Recall, the continued strong performance of the US economy, relative to the rest of the world, is certainly one factor behind the currency's recent recovery.

Markets will be looking for a month-on-month reading of 0.3% for April. Core retail sales are meanwhile forecast to read at 0.5%.

"In the US, the data of most interest next week will be April retail sales. After disappointing in the first two months of this year, sales picked up sharply in March. We expect another solid monthly rise in April of 0.4% overall and 0.5% for underlying sales," says a preview note from analysts at Lloyds Bank Commercial Banking.

Thursday, May 17

Keep an eye on the Philadelphia Federal Reserve's Manufacturing Index for May - this is one of the most timely surveys of US economic performance and could therefore move markets if the outcome deviates from expectation.

Markets are looking for a reading of 21, down on April's 23.2.

EUR: What to Watch

Tuesday May 15

German GDP for the first three months of 2018 is out at 07:00 B.S.T. Foreign exchange markets are positioned for a reading of 0.4% growth on a quarterly basis and an annualised rate of 1.7% to come out of the Eurozone's economic powerhouse.

For the Euro, the narrative of fading economic growth rates has become an issue and has been blamed for some of the single-currency's underperformance over recent weeks.

Should German GDP data disappoint we could well see this theme put downside pressure on the currency.

Second-estimate Eurozone GDP data for the first quarter of 2018 is due for release at 10:00, with annualised GDP forecast to read at 2.5%, and quarterly data expected to read at 0.4%. Industrial production for the Eurozone is out at the same time, analysts are expecting a monthly figure of 0.6%, and an annualised figure of 3.7%.

Again, disappointment here would almost certainly weigh on the Euro.

Wednesday, May 16

Eurozone inflation is out, and this could certainly move markets in light of the European Central Bank's stated objective of keeping interest rates as low as possible until such a time as inflation is rising back to their 2.0% target.

Annualised inflation is forecast to read at 1.2%, down from the previous month's 1.4%, while core CPI is forecast to read at 0.7%, unchanged on the previous month.

The Euro exchange rate complex is likely to act negatively should the data disappoint as it suggests the ECB will likely delay tightening monetary policy, something that has already been hinted at by key policy-setters. Much of the Euro's rise through 2017 was based on the expectation that 2018 would see the ECB take notable steps on withdrawing stimulus based on the view inflation was rising to their 2.0% target.

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