The Euro-to-Dollar Rate's Forecast For The Week Ahead

- EUR/USD is in a short-term downtrend but has now reached a substantial support level 

- The main release for the Euro in the coming week is Eurozone survey data in the form of PMIs

- The Dollar's main release is the minutes of the May Federal Reserve interest rate meeting

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The Euro has continued to decline against the U.S. Dollar, reaching new lows of 1.1749 after political developments in Italy raised concerns about the future of Italy's place in the Eurozone. 

The pair has fallen from a peak of 1.2555, reached in February, and is in a concerted downtrend, which overall is favoured to continue despite signs it is overstretched.

Although the current spot rate is 1.1768, these signs of overextension are raising red warning flags about the probable extension of the downtrend, and we would ideally be looking for a more definitively bearish break below 1.1700 to confirm a continuation lower, to a target at 1.1600, initially, followed by 1.1560 at the level of the November lows.

EUR/USD's current spot rate reflects a pull-back of 78.6% (circled below) of the previous rally, which is a key retracement level in financial markets.

A corrective move of 78.6% is sometimes associated with the potential for prices to stall and even reverse back up.

The MACD indicator in the lower pane is also suggesting the possibility prices are on the cusp of a period of recovery after appearing to have finished an abcd zig-zag pattern lower.

The pattern looks complete because wave c-d is now of a similar length to wave a-b, and the indicator is starting to turn up. A rise in MACD would support a higher exchange rate outlook.

On another chart below we also note the RSI is showing signs the trend may change, at least temporarily, and there could be a bounce.

The RSI has converged with the exchange rate at the current lows which means the price has made a new low but momentum has not.

RSI is below 30 and, therefore, also oversold which is a warning sign not to open any new bearish bets.

Finally, the pair broke down out of a triangle pattern in April and fell to its current level. It now looks like it has fulfilled its downside target, which technical analysts calculate by taking the golden ratio of the height of the triangle ('a') at its widest point and extrapolating it lower ('b') from the breakpoint.

Given the triangle has now fulfilled its target it signals an increased chance of a recovery beginning.

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Euro: What to Watch

The key release for the Euro in the week ahead will be the preliminary estimates of Eurozone PMIs for Services and Manufacturing in the region, in the month of May, which will be released at 9.00 GMT on Wednesday, May 23. 

PMI's are activity metrics generated by survey responses from pivotal procurement managers. They provide a timely and accurate gauge of levels of activity within the economy.

Because they will provide the first insight into the health of the economy in May they will be viewed as providing confirmation of whether the slowdown in Q1 has extended into Q2. If there are signs of a continued slowdown into Q2 the result may lead to weakness in the Euro.

A loss of growth in Q2 after the poor Q1 will begin to weigh on current expectations that the European Central Bank (ECB) will remove emergency stimulus by the end of the year, and it is only after they remove stimulus that they can begin raising interest rates.

Higher interest rates drive up the value of currencies as they attract greater inflows of foreign capital drawn by the promise of higher returns.

"Debate has continued over whether softer Q1 economic data, in a number of geographies, signals a cyclical downshift in momentum or a temporary blip," says Philip Shaw, analyst at Investec, adding, "from the Euro area, the ‘flash’ PMIs for May are due, providing the ECB with a key source of information on the direction of change in EU19 economic momentum ahead of its June ECB meeting and forecast round," he adds.

USD: What to Watch

The U.S. Dollar has been driven higher over recent weeks as US inflation expectations have risen, reflected in an increase in U.S. Treasury bond yields to above 3.0%, a measure of compensation for bondholders can expect from inflation depreciation.

Higher yields are generally indicative of higher interest rates, which tend to support the Dollar as they attract greater inflows of foreign capital, drawn by the promise of higher returns.

With this dynamic in mind, the focus on yields is likely to continue as the U.S. Federal Reserve is scheduled to release the deliberations of the Federal Open Market Committee at its recent interest rate-setting meeting, in the form of the publication of meeting minutes, at 19.00 GMT, on Wednesday, May 23.

"We expect U.S. Treasury yields to be in focus again with the publication of the minutes to the 1-2 May Federal Open Market Committee meeting and with Fed Chair Jerome Powell set to take part in a panel discussion at the end of the week," says Philips Shaw, analyst at Investec, adding, "the Fed’s 12/13 June policy meeting is now rapidly approaching. Ahead of this investors will be looking for signs that the Fed is looking to step up its pace of normalisation."

The other main economic data release for the Dollar is the preliminary estimate for May Purchasing Manager Indices (PMI) in Manufacturing and Services, released at 14.45, on Wednesday.

PMI's are surveys gauging the level of activity in key sectors. The Composite PMI is forecast to rise to 55.0 from 54.9 in the previous month, the services PMI is expected to rise to 54.9 from 54.6 and Manufacturing to remain at 56.5.

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