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EUR/USD Forecast for the Week Ahead: Potential for More Upside Conditional on Technical Break Higher

Euro exchange rate

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- EUR/USD is attempting to push higher.

- Move above 1.1430 would confirm a new trend higher

- The main release for the Dollar is CPI and for the Euro the meeting of the ECB

The Euro-to-Dollar exchange rate rose slightly last week before closing at 1.1393, up 0.38% from the previous close. Overall we see a marginal bias to more upside in the week ahead, conditional, however, on a clear break above the 50-day moving average (MA) situated at 1.1416.

The pair continues to trade above the 200-week moving average (MA) at 1.1310 which has acted as a hard floor ever since it was first touched at the end of October. Before then the MA also provided support in August.

EUR to USD weekly chart

"The 1.13 handle seems re-installed as the anchor of the pair and as we see a decent chance of rebound in the Euro area PMI this week, we think the short-term outlook for the EUR is starting to look a little more constructive," says Martin Elund, an analyst with Nordea Markets.

EUR/USD formed a key reversal bar three weeks ago which is a strong sign the downtrend could be reversing. This is when the exchange rate hits a new low and then reverses sharply higher all in the space of one bar.

The pair is converging bullishly with momentum. Convergence occurs when new lows in the exchange rate are not matched by corresponding new lows in momentum. It suggests bearish sentiment is lacking and the pair is vulnerable to a reversal.  

The daily chart is showing the formation of a possible bottom pattern called an inverse head and shoulders (H&S). This is composed of three troughs with the central low (the head) lower than the two either side (the shoulders).

EUR to USD daily

The inverse H&S’s neckline is drawn along the intervening peaks separating the three trough lows. If broken it provides confirmation of more upside. The normal length of the upside extension is equivalent to the distance from the lowest trough to the neckline replicated to the upside.

This inverse H&S has an eventual upside target at 1.1620, although the trendline at 1.1510 is likely to provide an obstacle and offer a more conservative target. A break above the neckline and the 1.1430 level would provide confirmation.

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The Euro: What to Watch

EUR

The main event for the Euro is the ECB policy meeting out at 12.45 GMT, on Thursday, December 13, with the press conference at 13.30.  

The ECB is expected to plough on with its roadmap to reducing monetary stimulus and announce an end to quantitative easing (QE) at the meeting. This is still expected by most analysts despite the growth rate falling to the lower band of 2018 forecasts and only hitting 0.2% in Q3.

“Although Mario Draghi could strike a more cautious tone at his post-meeting press conference on Thursday, he is unlikely to signal any change of path in the ECB’s policy normalisation plans just yet,” says a note from brokers XM.com. "Still, even if the ECB keeps policy and its forward guidance unchanged, the euro is at risk of coming under selling pressure from any dovish remarks by the ECB chief, as well as from downward revisions to the ECB’s quarterly staff projections.”

One key early indicator of growth in the Eurozone is the IHS Markit Composite PMI indicator. This is a gauge of activity in manufacturing and services sectors.

The PMI fell in both October and November, suggesting Q4 growth could still be low. Friday sees the release of the December Composite PMI at 9.00, which is currently forecast to show a slight recovery to 52.0 in December.

"While we have been alarmed by the lacklustre growth in the Euro-area, and if growth weakens further the ECB might be in dire straits, it could be that we will get some relief in December. After warning of downside risks to Euro-area PMI for a long, long time, our models are now inconclusive. It might be that Euro-area PMI surprises positively. If it does, current ECB pricing will be too depressed," says Martin Enlund, an analyst with Nordea Markets.

The ZEW survey is released on Tuesday at 10.00 GMT and is forecast to show sentiment falling by -25.0 from -24.1 in Germany, in November. The ZEW is sometimes seen as a reliable leading indicator for the economy. German data has been weak recently so the ZEW may gain more attention than usual.

Another key release for the Euro is Industrial Production on Wednesday at 10.00, which is forecast to show a 0.3% rise month-on-month compared to September.

Also given Germany slow-down fears, German trade balance data, out on Monday at 9.30, could come into focus.

There is a chance of a more positive surplus because exports are forecast to rise by a stronger 0.5% compared to imports which are only expected to rise 0.4%.

Germany has to import all its fuel so the recent sharp fall in oil should help increase the surplus.

 

The Dollar: What to Watch

USD

The main data release for the U.S. Dollar is inflation data out on Wednesday because of its impact on interest rates, a primary driver of currencies.

Broad US inflation is forecast to rise by 0.0% in November after a 0.2% rise in October. The slowdown is thought to be partly as a result of a precipitous fall in oil prices.

Core inflation which excludes food and fuel is forecast to rise by 0.2% like it did in the previous month.

Higher inflation pushes up interest rates, especially if it is due to stronger growth, and this pushes up currencies. Even if inflation eases in November analysts at Wells Fargo do not expect the US Federal Reserve, the body tasked with setting base interest rates, to change their expected course of raising interest rates in December.  

“We expect the pullback in headline inflation to have no bearing on the Fed’s rate decision for December. A softer-than-expected print for core inflation would also be unlikely to deter the Fed from going ahead with its widely-telegraphed hike in December. A miss on the core, however, could make officials comfortable with a more gradual path of policy tightening in 2019,” says a client note from economists at Wells Fargo.

Another event which might impact on the Dollar is the growing diplomatic crisis between Beijing, Ottawa, and Washington over the arrest of Meng Wangzhou, the CFO of Chinese mobile phone company Huawei, (and daughter of its owner) over her alleged fraud to avoid U.S.-imposed sanctions on Iran.

Meng is being held in Canada pending extradition to the US for trial. China has demanded she be released, saying her detention is, “unreasonable, unconscionable and vile in nature.”

The issue is fast becoming a major diplomatic incident which could easily boil over and impact the fragile trade war truce struck between the U.S. and China at the previous week's G20 summit.

Something similar is possible between China and the U.S. Quite how this would play out for the economies and currencies of the two superpowers is difficult to predict, but given China’s greater dependence on the U.S. then the other way around it is more likely to lose out from an escalation.

As such, if anything the Wangzhou incident could benefit the Dollar more than the Yuan, initially, if the conflict deepens.

The other key hard data release for the Dollar is Retail Sales on Friday, at 13.30, which is forecast to show a slower 0.2% rise in November from the previous month’s 0.8%. Given the power of the US consumer, retail sales is a pivotal metric of growth.

Industrial Production, out at 14.15 on Friday is forecast to rise 0.3% in October.

The other key hard data release for the US Dollar is IHS Markit PMIs for Manufacturing and Services, out at 14.45 on Friday. These are survey based gauges of activity and reliable leading indicators of broader economic growth.

Manufacturing PMI is expected to pull-back a basis point to 55.2 in December from 55.3 previously. Services is forecast to rise to 55.0 from 54.7.

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