Euro-to-Dollar Rate Week Ahead: Upside Terminated

- 1.1510 in focus according to technical analysis

- ECB's Draghi in focus at Sintra central banking event

- US Dollar will be eyeing US Fed's Powell at same event

Above: The ECB's Mario Draghi could once more set the tone for the Euro over coming days. Image (C) ECB.

The Euro slumped notably lower against the US Dollar last week after the European Central Bank quashed market hopes of an initial Eurozone interest rate rise next June while the Federal Reserve hiked its own key rate for the second time this year, and some strategists say it could extend those losses this week.

Europe's single currency had extended a fledgling recovery against the US greenback until the Thursday last week when the ECB told markets that Eurozone interest rates will remain at their current record low levels until "at least through the summer of 2019 and in any case for as long as necessary", which proved the straw that broke the camel's back.

Markets had previously come to believe the central bank would not only end its quantitative easing programme over coming months, but that it would also look to raise interest rates around June 2019.

Coming hard on the heels of Wednesday's rate hike from the Federal Reserve, the ECB statement sent the Euro-to-Dollar rate down by more than 300 points to 1.1550 Friday, which is close to its lowest level since July 2017.  

Downward pressure on the exchange rate was compounded by US economic data showing retail sales rising at close to double the pace that economists had forecast for the month of May. This reignited the "divergence" narrative that had seen markets bid the Dollar higher at the expense of other currencies due to faster growth and a brighter economic outlook over across the pond.

Economists are now increasingly forecasting that the US economy will expand by as much as 4% during 2018, while the European Central Bank says it expects Eurozone growth of little more than 2%.

"EUR/USD’s upside correction has terminated at the 1.1855 38.2% Fibonacci retracement and collapsed lower. Attention reverts to the recent low at 1.1510 and the 200 week moving average at 1.1416. Below 1.1415 would introduce scope to the 61.8% retracement at 1.1186. Rallies will now find the 20 day ma at 1.1702 offers initial resistance and we would expect 1.1855 to cap for a negative bias to remain entrenched," says Karen Jones, head of technical analysis at Commerzbank.

Jones says that if the Euro-to-Dollar rate were to somehow make it back above the 1.1855 level then it would no longer be in danger of setting new lows this year, but suggests that such an event is unlikely. Her medium term forecast is for the currency pair to head back toward 1.14 over the next one-to-three months.

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Data and Events to Watch for the Euro this Week

The week ahead in Europe sees the economic data calendar return to life after a five day period where the European Central Bank meeting for June was the sole event of importance for Euro area economy-watchers.

Mario Draghi will speak at a central banking conference in Portugal on Monday, Tuesday and Wednesday, at 18:30, 09:00 and 14:30 London time respectively, which will provide plenty of scope for the European Central Bank President to clarify or elaborate on last week's interest rate message. Markets will listen closely to the speeches in case of any hints that interest rates may actually rise sooner or later than markets were led to expect last Thursday.

On Friday IHS Markit will release the latest preliminary readings of its purchasing managers' indices (PMIs) for the Eurozone manufacturing and services industries, which will be watched closely by the markets for clues about the current condition of the Eurozone economy.

Eurozone economic growth almost halved at the start of the year when first-quarter GDP rose by 0.4%, which is still a respectable figure, and the economy is yet to show signs of having rediscovered its mojo so far during the second quarter. Euro-bulls will be hoping it has because a recovery of growth momentum will be key to the ECB meeting its inflation target and, therefore, the central bank's ability to eventually raise its interest rate.

Markets will also keep a close watch on the White House, China and European Union for signs of an escalation in the so called "trade war" after the US administration listed a large number of Chinese export goods that will be targeted by US tariffs over the coming days.

The move advances an earlier plan to pressure China into changing some of its trade practices and to voluntarily reduce its bilateral trade deficit with the US, but it also risks riling global financial markets if it looks at any point as if the two countries could be about to renew an earlier tit-for-tat tariff fight.

Tensions between the US and EU are also running high after President Trump slapped tariffs onto their steel and aluminium exports to the US.

Data and Events to Watch for the Dollar this Week

The week ahead in the Us also sees the economic data calendar fall quiet after its own action-packed five day period that saw figures show inflation and retail sales rising faster than was expected in May, as well as the Federal Reserve announcing a second interest rate rise for 2018.

Fed rate setters also added another dot to the so called "dot-plot", which details policymaker expectations for interest rates over coming years, suggesting most voting members on the Federal Open Market Committee see themselves backing a faster pace of rate rises at some time during the months ahead.

Federal Reserve chairman Jerome Powell will take part in a panel discussion, due at 14:30 London time on Wednesday and to take place at the central banking conference in Portugal, marking the sole event of importance in the calendar for the US Dollar next week.

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