Euro-to-US Dollar Rate in the Week Ahead: Volatility Possible as Triangle Forming

Modified: Monday, 23 July 2018 09:20 BST

Image © moonrise, Adobe Stock

- Wave studies suggest a new leg lower in EUR/USD must unfold

- However, other technical studies are bullish

- Euro eyes ECB decision this week, US Dollar wary of Trumps 'weak Dollar' policy

EUR/USD is quoted at 1.1731 at the start of a new week as the pair continues trading in a range located roughly between 1.15 and 1.18, as it has done since the end of May.

Our studies of the market suggest a slight downside bias should be adopted and therefore lower prices could be on the horizon.

The pair is currently at 1.1719, towards the range highs, following comments from president Donald Trump on Friday in which he criticised the Federal Reserve's hiking policy for overly strengthening the Dollar and making the US un-competitive.

The sideways market has taken on the shape of a triangle pattern after tapering steadily over time.

The triangle is probably almost complete since it has formed almost 5 waves. Once it is complete it is likely to break lower since it is marginally more likely to break in the same direction as the trend prior to formation, which in this case is down rather than up. Nevertheless, it is worth bearing in mind that it could also break higher.

If the triangle does break lower it will probably reach a target at 1.1360 which is the 61.8% extension of the height of the triangle at its widest point, and represents the conservative estimate for a downside break. Such a move would gain confirmation by breaking below the 1.1500 lows.

A recent Elliot wave forecast also sees the pair breaking lower after formation of the triangle which is seen as a wave (iv), which will probably be followed by a final wave (v) lower to a target between 1.1489 and 1.1320.

Elliot waves are cycles of buying and selling, of rising and falling prices, which are composed of 5 waves numbered 1-5, or labeled using Roman numerals, as in I, II, III, IV, and V.

Waves 1,3 and 5 move in the direction of the dominant trend whilst 2 and 4 represent corrections. Wave 3 is almost always the longest and the strongest wave.

After a 5-wave pattern has finished the market corrects back in a shallower counter-trend move labeled A,B, and C.

While our own technical studies hint at the potential for downside, other analysts take a different view of the market.

"The bias remains bullish," says a note from the strategy desk at Swissquote Research, hinting at the underlying short-term trend being enjoyed by the single currency.

"Long positions above 1.1720 with targets at 1.1765 & 1.1785 in extension," add Swissquote in a note dated July 23.

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Week Ahead for the Dollar

For the Dollar, we will be very interested in hearing what analysts and markets make of Donald Trump's attack on Dollar strength and the Federal Reserve's policy of raising interest rates.

The move is widely touted as part of a broader 'weak Dollar' policy Trump intends to pursue in order to boost US exports relative to imports. Following the comments, the Dollar sank sharply suggesting a degree of success.

However, it is widely known that 'jawboning' becomes increasingly ineffectual unless the threats are followed by material actions.

The US President has proven he does not follow the established rule books when it comes to international diplomacy and domestic politics therefore markets will continue to expect the unexpected. This will keep us on edge for further FX market volatility over coming days.

On the calendar, US GDP in the second quarter will be the highlight of the US economic calendar, when it is released on Friday, July 27 at 12.30 GMT.

Currently markets are forecasting a 4.1% rise in Q2 compared to Q1, which would be very strong, although Q1 was unusually weak. Nevertheless, such a strong rise would finally end the argument over whether Q1 was slow due to bad weather or deeper economic problems.

"The Trump administration’s tax cuts at the start of the year are thought to have stimulated consumer and business spending, putting the US at the top of the growth league table among advanced economies," say brokers XM in a week-ahead briefing, adding:

"Given the strong gains for the US dollar in the past two weeks, a large miss in the data would come as a shock for the markets and could lead to a sharp sell-off. Similarly, a much stronger-than-expected figure would raise questions about the Fed’s “gradual” rate hike policy."

With a JP Morgan economist recently quoted as saying we should expect growth of circa 5.0% in Q2, the 4.1% currently expected may actually be a little on the low side, and there is potential for an upside surprise as much as a downside one, so more Dollar rises are a distinct possibility.

Another major release for the Dollar is Existing Home Sales on Monday, July 23 at 14.00.

Forecasters are expecting a 5.44m rise in June from 5.43m in May.

There may be an increased focus on the housing data after the large -12.3% surprise fall in housing starts registered last week.

June New Home Sales which are also scheduled for release next week, on Tuesday, at 14.00, could be even more susceptible to a slowdown than existing sales.
Analysts are already expecting a fall to 0.671m from 0.689m previously, no doubt reflecting the slow-down seen in 'starts' last week.

"The number of housing starts in the US fell by the most since Donald Trump was elected president, with the latest data undershooting market expectations by some margin and dragging Wall Street futures and Treasury yields lower," said the Financial Times of the poor data last week.

The reasons for the sudden drop were a shortage of labour, a rise in construction material costs, rising borrowing costs and sluggish wage growth which cannot keep apace with rising house prices.

Housing data is key because it seen as 'leading the economy' by many and is therefore an early warning system for broader based slowdowns.

Last week's housing starts fall brought it to a 9-month low from a historic peak reached in May.

Finally, Thursday, July 26 sees the release of Durable Goods Orders, which are orders of big price tag items. These are forecast to show a large 2.8% rise from -0.6% previously, although, the metric can be impacted by large aviation orders for airline jets etc, so require careful reading.

Goods Orders Non Defense Ex Air (MoM) (Jun), for example, which excludes a lot of these extremely large orders is expected to rise only 0.5% compared to 0.3% previously.

What's on the Calendar for the Euro this Week

For the Euro, we will be very interested in hearing what analysts and markets make of Donald Trump's attack on Europe on Friday, July 22 where he accused policy-makers of deliberately manipulating the value of the Euro to boost the region's competitiveness in international trade.

The US President has proven he does not follow the established rule books when it comes to international diplomacy therefore markets will continue to expect the unexpected. This will keep us on edge for further FX market volatility over coming days.

The main calendar event in the week ahead for the Euro is the meeting of the European Central Bank (ECB), with the release of the governing council's decision scheduled for 11.45 GMT, on Thursday, July 26.

Analysts will be looking for further confirmation that the monetary policy strategy outlined in the June meeting, which included ending the ECB's stimulus programme by the end of 2018, and raising rates after the summer of 2019, remains intact.

Yet beyond a possible clarification of timings no change in policy is forecast by the market on Thursday.

"The clouded outlook for businesses is almost certain to keep the ECB on a cautious course even as the central bank readies to pull out of its bond buying programme," says broker XM in their week-ahead note.

"Following last month’s landmark decision to call an end to four years of quantitative easing, investors will be hoping for more clarity on the ECB’s forward guidance to keep rates on hold “at least through the summer of 2019”, with some reports suggesting that Governing Council members had their own differing interpretations of what this meant," continues the broker.

"The unexpectedly dovish rate path forecast has been weighing on the euro ever since. But the single currency could benefit from any hint that a rate hike could come before the end of 2019, which is the current market pricing," add XM.

On the hard data front the Euro could also me moved by PMI data on Tuesday at 9.00 GMT.

The PMI for the manufacturing sector is forecast to come out at 54.7 in July from 54.9 previously, and for Services at 55.0 from 55.2 in the previous month of June.
PMIs are surveys of purchasing managers, who occupy key positions in firms which are thought to give them enhanced insight into general business conditions.

PMI's are a useful forward indicator for economic growth, and closely watched by the market. A result above 50 is expansionary and below contractionary.

The other main release in the week ahead is Eurozone Consumer Confidence, out on Monday at 14.00, which is forecast to show a -0.7% drop in July from -0.5% previously.

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