Euro to Dollar Week Ahead Forecast: A Decisive Week

Above: File image of ECB President Christine Lagarde. Copyrights: Angela Morant/ European Central Bank.

The Euro to Dollar exchange rate is relatively well supported as it approaches Thursday's European Central Bank decision and a pivotal U.S. jobs report on Friday.

The Euro recovered through February, and the charts indicate that any pullbacks continue to find decent support at 1.08 in the near term.

Euro-Dollar bounced off the 1.08 region on Friday following the release of stronger-than-expected Eurozone inflation numbers, and given the low volatility across the global FX market over recent weeks, it would be prudent to suggest that 1.08 will continue to hold into this week's event risk.

Above: EUR/USD at daily intervals, showing decent buying interest at 1.08. Track GBP with your own custom rate alerts. Set Up Here

Euro-Dollar's February recovery has now run out of steam with short-term momentum indicators fading, and this suggests Euro-Dollar topside will be contained below 1.0890 as markets await new clues on central bank policy.

In this regard, Thursday's March ECB policy meeting will be the key event for the EUR this week.

"FX investors will focus in particular on the bank’s new growth and inflation projections given that they could offer important clues about the timing and pace of future rate cuts. Also of significance would be any indications from President Christine Lagarde that any further tightening through the ECB's balance sheet policies may warrant more aggressive rate cuts," says Valentin Marinov, Head of FX Research at Crédit Agricole.

Crédit Agricole maintains a bearish long-term outlook on the EUR from current levels.

The Euro rose on Friday following the release of stronger-than-expected Eurozone inflation data, which suggests to markets that the ECB will push back against any talk of an imminent move to cut interest rates on Thursday.

The data revealed that service inflation pressures remain acute in the Eurozone, prompting the ECB to say it wants to see softer wage dynamics (which would weigh on service inflation) before cutting interest rates.

Maitreyi Das, Global Economist at HSBC, says investors will closely watch for any forward guidance on the timing of the first rate cut. "We don’t think the ECB will be confident enough that the eurozone has gone far enough 'along the disinflation process' even to discuss rate cuts."

"While headline inflation has fallen, core inflation remains higher than the ECB would like and real wages remain high. We expect the first rate cut to come in June," she adds.

The rise in the Euro through the previous week betrays a market positioned for a relatively 'hawkish' ECB, which would mean the upside risks to the Euro on the day are limited.

This means the surprise factor would be if the ECB condones expectations for a mid-year cut, arguing it believes inflation is still on course to hit 2.0% sustainably.

This would likely result in a weaker Euro and prompt a Euro-Dollar probe below 1.08, but we would expect moves to be faded ahead of Friday's U.S. jobs report, which is the week's main event.

Image courtesy of UniCredit.

Pound Sterling Live reported on Friday that a major U.S. asset manager has said it now expects no interest rate cuts from the Federal Reserve in 2024, which, if proven correct, would prove bearish for Euro-Dollar.

The argument from Apollo Global Management is that the U.S. economy is reaccelerating and that inflation is pointing higher again, meaning the Fed won't be able to cut interest rates.

Markets have already shaved expectations from six to three rate cuts in 2024, and this repricing will extend on another blow-out U.S. jobs report. The risk is that such an outcome would prompt the market to wake up to Apollo's viewpoint following another hot data reading, and panic ensues.

The market expects a non-payroll reading of 190K, and we look for the USD to rally and push Euro-Dollar below 1.08 if the data comes in hot. By the same token, look for Euro-Dollar to return towards 1.09 if the data undershoots.

Economists at UniCredit Bank say payroll gains are likely to correct downwards; "We expect payrolls rose 170k in February after a surge of 353k in January. We would not be surprised if payrolls in the prior two months were revised downwards."

UniCredit says a range of private surveys points to a softening labour market. If correct, the Dollar could retreat on Friday and the following days.