Euro-to-Dollar Week Ahead: Eyeing the end of the Downtrend

Image © European Central Bank

At the start of the new week, EUR/USD is quoted at 1.1688, 0.18% higher than where it closed the previous week.

Concerning the outlook, we see the potential for brighter days ahead for the Euro. There's an old saying in financial markets that "the trend is your friend until the bend at the end," well in the case of EUR/USD it may have reached that bend, in other words, the sell-off may be over.

The sharp rise in the exchange rate over the last two days, from Tuesday's trough low of 1.1502 to the current 1.1686 level, is a relatively good sign the pair may be reversing.

The rebound is accompanied by an equally sharp rise in the RSI momentum study in the bottom pane, which has now moved out of oversold territory, thereby also signalling a bullish reversal in the trend.

Whilst it is a bit early to predict whether this recovery represents a complete reversal or just a correction, we now, on balance, expect higher prices.

We, therefore, forecast a move up to the monthly pivot (PP) at 1.1760 conditional on a break above the previous day's highs at 1.1725.

We earmark the monthly pivot as a target because pivots - which are levels used by traders to assess the trend - act as obstacles in and of themselves and often lead to the exchange rate stalling or completely reversing.

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Week Ahead: EUR

The Euro is outperforming the Dollar but more-or-less unchanged against the Pound.

We are told the market will watching rhetoric from central bankers this week. Although Fed rhetoric is absent due to the blackout period, ECB speakers will be heavily featured. Amongst others, watch for Draghi and Weidmann (both Tuesday) and Praet (Wednesday).

The key question is this - are they going to prime markets for an exit from quantitative easing, something that should be announced at the July meeting?

If yes, then expect the Euro to be bid, if no then we could see the single-currency come under pressure once more. Based on the inflation numbers out last week the ground for an exit from quantitative easing are in place, so we would say a steady-as-she-goes message from the ECB members will be likely.

The data calendar for the Eurozone is quite thin in the week ahead and we would therefore expect markets to be more interested in European politics, particularly the first moves by the newly-installed Italian government.

Tuesday, June 5: The composite PMI for May is released at 09:00 B.S.T. and should give a wholistic overview of Eurozone economic activity in May.

Consensus forecasts are eyeing a reading of 54.1, unchanged on the previous month.

The services PMI is released at the same time and markets will be looking for a reading of 53.9.

Thursday, June 7: GDP data for the first quarter is released, this is the second estimate so don't expect fireworks.

Seasonally adjusted GDP rose by 0.4% in both the Eurozone (EA19) and in the EU28 during the first quarter of 2018, compared with the previous quarter, according to a preliminary flash estimate published by Eurostat.

An unchanged reading is expected.

Week Ahead: USD

The US Dollar is the laggard at the start of the new week, coming in lower against the majority of the G10 despite the positives from the labour market report released ahead of the weekend.

A general 'risk-on' environment in global financial markets at the start of the new week appears to be undermining the typical safe-haven currencies such as the Dollar, yen and Swiss Franc.

"Despite the political turmoil around the globe, markets are mainly positive this morning. Asian stocks are higher and S&P500 futures are also slightly up. The US 10-year Treasury yield has moved above 2.9%. Some of the positive mood this morning may stem from the strong US jobs report Friday, which was strong in all directions," says Mikael Olai Milhøj, Senior Analyst with Danske Bank.

Jobs growth was higher than expected (223,000 versus 188,000 expected), the unemployment rate dropped to 3.8% from 3.9% and average hourly earnings rose 0.3% m/m (0.2% expected)

Looking ahead:

"This week, expect a reversion to US-centric cues and central bank watching. The fundamental picture underlying the broad USD – economic outperformance, yield differential arguments, and shifts in USD positioning – remains largely intact. One thing holding the USD back, though, is the still cautious rhetoric from the Fed regarding its rate hike path," says Terence Wu with OCBC Bank in Singapore.

The United States continues to enjoy impressive economic growth, and prices are expected to keep rising ensuring the Federal Reserve is liable to raise interest rates three times in 2018 and a further three times in 2019.

If the numbers increase, expect the Dollar to firm up, but this will only occur if the data continues to impress against expectations.

Monday, June 4: Watch the release of durable goods orders and factory orders for April, out at 15:00 B.S.T. Factory orders are forecast to read at -0.3%. These releases are second-tier in nature so we doubt they will deliver fireworks.

Tuesday, June 5: The ISM non-manufacturing PMI will catch markets attention at 15:00 B.S.T. Markets will be pricing the U.S. Dollar for a reading of 57.2, any disappointment might hurt the currency, and a beat will likely aid it higher.

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