EUR/USD Week Ahead Forecast: Looking for a Breakout, ECB is Key Risk

Euro exchange rates

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- Short-term uptrend remains intact but weak

- Break above highs required to confirm

- Euro looks to central bank meeting; USD to payrolls

A tough level of resistance lies in the way of the EUR/USD exchange rate's gentle short-term rally and we would not expect a major move until the meeting of the European Central Bank is concluded.

The Euro-to-Dollar rate is trading at 1.1362 at the start of the new week, less than two-tenths of a cent higher than the previous week.

Gains by the Euro could have been greater were it not for the U.S. Dollar comeback seen towards the end of the week following a strong run of data releases and optimistic communication from the Federal Reserve.

Some of the good feeling from the previous week may be carried forward into the week ahead providing a negative fundamental backdrop for the EUR/USD pair, and much will depend on the European Central Bank (ECB) meeting on Thursday which carries considerable event-risk - and opportunity - for the Euro.

The charts are reflecting these mixed fundamentals, and whilst, technically-speaking, the short-term uptrend which began at the February 15 lows is still intact, and therefore biased to continue higher, the 50-day moving average (MA) is proving a tough obstacle to overcome and could very well mark the site of a reversal for the pair.

EUR to USD daily

It would require a break clearly above the 1.1420 February 28 highs to renew confidence in further upside, to a target at 1.1490, at the level of both the R1 and 200-day MAs - both levels likely to act as barriers to further upside.

EUR to USD 4 hour

The four-hour chart more clearly reflects this ambiguity. The pair was rising quite steadily from mid-February until it started to weaken last week as shown by the volatile spikes in price action at the highs.

These sorts of spikes tend to occur at the end of trends and so give the chart a more bearish look-and-feel than the daily chart. They suggest the pair could be undergoing a more substantial reversal.

EUR/USD has also broken clearly below the trendline drawn from the January lows and this is a further sign of weakness.

Momentum has fallen even more steeply than price action and this can presage losses in the exchange rate itself. Note how momentum is now lower than it was for most of the preceding rally.

Yet despite all these bearish signs, there is still insufficient downside from price action itself to signal a bearish reversal. For that, we would ideally need to see an uninterrupted sequence of two lower lows and lower highs, which is not yet the case.

EUR to USD weekly

The weekly chart is also looking a little precarious - for whilst the pair is being supported by the 200-week MA, the long bearish candle which formed three weeks ago and the lack of a strong recovery since is a negative sign and could suggest another long down week may be on the cards.

EUR to USD monthly

The monthly chart is also showing mixed signals. On the one hand, the 50-month MA, which is a powerful support level, is successfully holding the exchange rate up and could be the site of a reversal higher, yet at the same time, momentum is sliding worryingly and the slow divergence between the two could be a warning sign of further losses to come.

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The Euro: What to Watch this Week

The main event for the Euro is the European Central Bank (ECB) rate meeting on Thursday at 12.45; whilst no change in policy is expected there is a risk the Bank could announce it is extending its TLTRO programme which provides Eurozone banks with cheap lending, and this would be seen as a de facto form of easing, which could weigh on the Euro.

The ECB was supposed to be hurtling towards an interest rise in 2019, and reopening the TLTRO programme represents a turn away from tighter monetary policy that in turn suggests an interest rate rise has now been kicked forward deep into 2020.

At its previous meeting, the ECB stuck to its roadmap of returning crisis-era monetary policy to normal, which included raising interest rates back up to positive levels after the summer of 2019. If it changes this view, reflected in, perhaps, a change of wording in its statement, this could definitely weigh on the Euro because higher interest rates, or the expectation thereof, is generally positive for a currency, as higher rates attract and keep greater inflows of foreign capital.

At the meeting, the ECB will also release its staff macroeconomic projections and these too will be published with the statement of monetary policy. If they reveal a deeper-than-expected downgrade in forecasts this too could have implications for the Euro which would take any major downgrades negatively. As a comparison, the European Commission's own figures, released at the end of 2018, showed a downward revision of Eurozone growth expectations in 2019 from 1.9% to 1.3%.

On the 'hard' data front, the main release is probably retail sales in January, out on Tuesday at 10.00. This showed a slump of -1.6% in December but markets are expecting a 1.0% recovery in January. Compared to last year, sales are forecast to rise 1.8% from 0.8% previously. If there is no rebound in sales, however, it could pressure the Euro marginally lower.

Other data consists of final revisions - to Q4 GDP and employment change, which unless large, are unlikely to affect the exchange rate.


The Dollar: What to Watch this Week

Labour market statistics form the main 'hard' data release in the week ahead for the Dollar.

Non-farm Payrolls are forecast to rise 180k in February after increasing by a very strong 304k in January. Most of the attention, however, will not be on the headline payrolls figure but on the accompanying wage data since this has more of a bearing on inflation and therefore Federal Reserve policy on interest rates.

Average hourly earnings are expected to have risen by 0.3% in February from 0.1% in January. A greater or lesser-than-expected rise could impact on the U.S. Dollar.

Higher wages equal higher inflation normally, and this puts pressure on the Federal Reserve's FOMC to raise interest rates. Higher interest rates tend to push up the value of a currency by attracting and keeping greater inflows of foreign capital.

“Another blowout report would raise questions about how long the FOMC may remain “patient” before lifting rates further this year. A surprisingly soft number, however, is unlikely to sway the Fed’s near-term policy stance given that a broad array of data still point to a strong jobs market overall,” says a client briefing from economists at U.S. lender Wells Fargo.

Non-manufacturing ISM data is a major release for the U.S. Dollar in the coming week. It is forecast to show a 57.2 rise from 56.7 previously when it is released at 15.00 on Monday, March 4.

The ISM is a sentiment survey based on the responses to questionnaires from pivotal procurement managers in the sector under observation. A result above 50 indicates expansion and below contraction. They are normally strong leading indicators for the economy.

“With the shutdown over, we expect to see a modest bounce-back in the February ISM non-manufacturing index, consistent with the service-sector PMIs from the Federal Reserve system rebounding,” say Wells Fargo. “Another near-60 reading would suggest that the U.S. economy is handling recent “crosscurrents” without much issue and therefore raise the prospect of the FOMC increasing the fed funds rate again this year. A downside miss, however, would support the FOMC remaining in its current holding pattern on rates.”

Other key data for the Dollar next week includes December new home sales on Tuesday (at 15.00), and the final reading of the December trade balance (at 13.30) on Wednesday.

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