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EUR/USD 5-Day Forecast: Looking for an Extension Lower

 Euro exchange rate

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- EUR/USD now in concerted short-term decline

- Momentum bearish and signs are of continuation

- Main release for Euro are PMIs

- Dollar eyes FOMC minutes

The Euro-to-Dollar exchange rate is trading at 1.1154 at the start of the new week after declining 0.67% in the previous week after it fell for five consecutive days.

From a technical perspective, the EUR/USD has reversed its previous short-term trend and is falling within a medium-term bearish channel.

It is likely to continue until it gets closer to the lower border of the channel, or the April lows. It has conformed to the boundaries of its channel ever since the start of 2019 and it will probably continue. This biases EUR/USD to further downside as it continues to conform to the channel’s patterning.

EUR to USD daily chart

A break below the 1.1150 level would probably confirm a continuation down to 1.1110 and the April lows - the next main target for the current down-leg.

Momentum, as measured by the RSI indicator in the lower panel, is falling at the same time as price, corroborating the downtrend and suggesting it will continue.

1.1110 is also coincidentally the level of the S1 monthly pivot, which is a minor support level and likely to add an underpinning of strength to the level. The level is achievable within 1 to 2 weeks.

More downside to an eventual target at the lower boundary of the falling channel at 1.1075, is also possible if the pair successfully breaks below the April lows, which is possible under particularly bearish conditions.

This level could be reached within the next month.

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The Euro: What to Watch this Week

The main events for the Euro in the coming week are the release of Eurozone PMI survey data for May, which markets use as a leading indicator for economic growth, and the start of the EU elections in some parts of the region, although the voting won’t officially conclude until Sunday.

The Eurozone May Composite PMI is forecast to show a rise to 51.7 from 51.5. The Manufacturing PMI is forecast to recover to 48.2 from 47.9, but remain in contraction mode (signified by a result below 50). Services sector PMI is expected to rise to 53.0 from 52.8. The data could be key to the Euro.

“Perhaps the most crucial release of the week, will be the Eurozone’s preliminary PMIs for May – out on Thursday. Euro area growth has struggled in recent quarters, leading the European Central Bank (ECB) to put its rate-hike plans on ice and consequently hurting the euro. In fact, investors believe the normalisation ship has sailed, with money markets now suggesting a small probability for an ECB rate cut this year, not a hike,” says Raffi Boyadijian, an economist at XM.com.

There is the potential for political risk to impact on the Euro as countries vote in the EU elections starting on May 23.

Signs of big swings to Eurosceptic parties is a risk to the Euro as it would bring into doubt plans for greater integration which would probably benefit the currency.

 

The Dollar: Fed Dominates the Week's Calendar

Data is probably not going to be the key release for the U.S. Dollar as the releases scheduled for the coming week are not particularly significant.

Of interest though are likely to be the minutes of the most recent Federal Reserve (Fed) meeting in May, which will be released on Wednesday at 19.00 BST, as these are likely to give an insight into the debate by officials during the meeting before they voted to keep interest rates on hold.

Jerome Powell, the chairman of the Fed, said he did not see a strong case for moving interest rates in either direction at the press conference following the meeting suggesting a neutral official stance.

Some Fed policymakers, however, have indicated that they could lower interest rates if inflation does not pick up.

Fed presidents from Richmond, Boston and Minneapolis have gone further and expressed concern over whether a prolonged trade conflict might warrant a policy response because of the negative impact on the economy.

If the minutes appear to pitch the Fed in even a marginally more dovish (meaning in favour of lower rates) direction it will probably impact negatively on the Dollar.

The market is seeing a higher probability of a rate cut than rise, according to Fed fund futures, which calculate a 73.4% probability of a cut by the end of the year.

Trade tensions could also cause volatility, however, the impact on the U.S. Dollar isn't always clearly correlated.

When tensions worsen the Dollar sometimes rises because its emerging market counterparts weaken and it gains on safe-haven flows. There may also be a case for seeing the Dollar weaken, however, due to negative impact on the U.S. economy from tariffs.

The main risk is that the U.S. raises tariffs on a wider variety of Chinese imports, further inflaming the dispute.

The two main hard data releases for the U.S. Dollar are durable goods orders in April, out at 13.30 on Friday, and data on both existing and new home sales out at 15.00 on Thursday and Tuesday respectively.

Durables are likely to decline due to the grounding of the 737 Max because of a technical fault.

“The grounding of the Boeing 737 MAX and subsequent negative headlines have led to net cancellations, which will weigh heavily on April’s outcome as aircraft orders account for roughly 10% of the total. As a result, we expect total orders fell 3.8% during April,” say Wells Fargo in a client note on the matter.

Their estimate is more than the -2.0% consensus forecast.

U.S. housing data went through a bad patch, which is concerning since housing often leads the economy, however, Wells Fargo note the sector has seen improvement, so data this week may surprise to the upside.

“At least the recent pickup in the housing market remains on track. Housing starts rose 5.7% in April. Building permits also improved, and do not look to have been quite as low as previously thought. The pullback in mortgage rates, lower material costs, and improved builder sentiment should help to keep the rebound in residential construction intact,” say Wells Fargo.

Official estimates, meanwhile, are for existing home sales to rise 2.6% in April but new home sales to fall -2.8%. Data will clarify next week.

BannerTime to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

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