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The Euro-Dollar Week Ahead: Flirting with Key Support On Charts as Major Economic Numbers Loom

- EUR/USD charts point lower but key support in sight.

- Cluster of levels around 1.10 set to support EUR/USD.

- But break of 1.0980 would be harbinger of more losses.

- EUR eyes Ifo, GDP and CPI figures on Thursday & Friday.

- USD eyes Fed decision, Q4 GDP data and coronavirus.

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The Euro was among the worst performing major currencies last week as investors favoured either higher-yielding or safe-haven assets throughout, although it's now near key support levels on the charts while economic figures due over the coming days could offer the single currency some upside.

Europe's unified unit was the third worst performer last week after getting the better of only rival European currencies, with the low-yielding continent having been left mostly in the shade as investors alternated between bidding for safe-havens and anything else that offers a modicum of yield. 

Charts were still tipping the Euro lower early on Friday but the hours before the weekly close brought the currency into contact with a cluster of notable technical support levels that may prove to be its salvation early in the new week.

However, investor appetite for risk and expectations for economic figures due later in the week will also influence the Euro-to-Dollar rate. In other words, the next update on the spread of China's new coronavirus could impact price action Monday and so too could the 09:00 Ifo survey from Germany. 

Above: Euro-to-Dollar rate shown at hourly intervals.

"EUR/USD has eroded the 3 month uptrend. The intraday Elliott wave signals remain slightly negative and this leaves attention on the downside to initially the 1.0981 29th November low. More importantly it has neutralised our bullish bias and forced us once again to the sideline," Karen Jones, head of technical analysis at Commerzbank in a note to clients early on Friday.

The Euro has been trapped within a narrow range spanning the distance between 1.10 and 1.12 for months now although Friday's price action has seen it test the lower bound of that range and absent a catalyst for a bounce higher, the breakout to the downside may well be likely. Jones says the single currency will face tough resistance between 1.1184 and 1.1240, which guard the path toward the 200-day moving-average located around 1.1359. 

"Further EUR weakness will find support at the 1.1020 and 1.1010 marks, while the 1.1000 psychological barrier will be key in limiting continued declines. The common currency also looks rather oversold as it nears the bottom of its Bollinger band at 1.1033 with its distance from this mark at its narrowest point since mid-Nov. Resistance stands at ~1.1050 followed by ~1.1070," says Juan Manuel Herrera, a strategist at Scotiabank in the noon hours Friday. 

Above: Euro-to-Dollar rate shown at daily intervals.

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The Euro: What to Watch 

The Euro was among the worst performing major currencies last week as investors appeared to favour higher-yielding and safe-haven assets over lower-yielding or riskier alternatives, although the single currency's trajectory in the coming days will be determined by a combination of factors. 

Europe's single currency may face competition from safe-havens to start the week after China's National Health Commission said the country's new coronavirus can be transmitted from human-to-human even in its incubation stage - in other words before sufferers begin to display observable symptoms. The number of infections more than quadrupled last week to 1,975 by midnight Saturday while the number fatalities rose to 56. 

"The main risk in the short term is not disappointing EUR data, as we expect a bounce in the German Ifo next week, or even US PMIs continuing to recover, instead it’s the recent pickup in EUR’s correlation with CNH. Developments on the coronavirus during the LNY will be key for EURUSD here and the risk-reward will be for a lower EUR until it becomes clearer what may happen next," warns Jordan Rochester, a strategist at Nomura

However, Monday's survey of German businesses from the influential Ifo institute could offer the Euro some support, if not cause for gains, so long as it confirms the optimism detected by last week's ZEW survey. The ZEW survey showed both current conditions as well as sentiment around the six-month outlook rising handsomely in January and given that an economic recovery in the Eurozone is key to the Euro's future fortune, any rebound in the Ifo may help arrest last week's decline in the single currency. 

Consensus is looking for the Ifo index to have risen from 96.3 to 97.1 when the figure is released at 09:00 Monday. The Euro may be more sensitive to an upside surprise than a downside move given the single currency has fallen toward the bottom of a multi-month range over the last week. The European Central Bank (ECB) is also not expected to cut its interest rate again at any point soon, which somewhat insulates the Euro from the effect of adverse data.  

"The euro has clearly been hit this week from the global growth uncertainty linked to the risks of an escalation of the coronavirus. This is a risk of course next week if there are further signs of escalation," says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG. Political uncertainty in Italy [is] unlikely to last. If the IFO Business Climate Index on Monday then reinforces the perception of an upturn in business confidence, we see reason for any downside in EUR to reverse – although of course volatility remains low and hence moves are likely to remain modest."

The Ifo survey will give markets a glimpse of what might be around the corner for the Eurozone while GDP figures due out at 10:00 Friday will provide insight into the condition of the economy at year-end. At the same time Eurostat will reveal whether the December inflation rebound back to 1.3% endured through January. Both of those numbers, which are out at 10:00 Friday, will be important for sentiment toward the Euro over the coming weeks. 

Consensus is looking for Eurozone inflation to have risen from 1.3% to 1.4% this month although it's also looking for the more important core measure of price growth to have dipped from a multi-year high of 1.3% back to 1.2%. The core benchmark has held at 1.3% since November and any continued resilience would likely be welcomed by the single currency because it could be interpreted as progress made by the European Central Bank in its efforts to deliver the "close to, but below 2%" inflation target. 

However, and especially as it relates to the Euro-to-Dollar rate and Euro-to-Pound, other international factors will also be in the mix including interest rate decisions from the Federal Reserve and Bank of England that will be sure to impact trading in the Pound and Dollar.

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The Dollar: What to Watch

The Dollar gained over most rivals last week after benefiting from a hunt for yield in financial markets and fears over the spread of China's new coronavirus and although these factors will remain front and centre for investors in the days ahead, the current condition of the U.S. economy will also demand attention too.

New economic data has been thin on the ground in the U.S. of late although the same cannot be said this week because the current condition of the economy will be brought back to the fore by Wednesday's 19:00 interest rate decision from the Federal Reserve and final quarter GDP data. Consensus is for the Fed to leave its interest rate unchanged at 1.75% so it'll be the accompanying statement that garners the bulk of the market's attention instead. 

Investors will take their cues from any changes to the Fed's assesment of the jobs market as well as domestic and global economies because the bank has made all of those key to its future interest rates decisions. And on each of those scores, the latest information supports arguments in favour of an unchanged interest rate stance and guidance for more 'data dependent' sitting-on-hands from Chairman Jerome Powell and the Federal Open Market Committee. 

"We do not expect any material change to balance sheet plans or in the key policy rate next week. The Fed is likely to maintain a cautious tone over the outlook for the US economy while acknowledging downside risks from trade have eased, says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG.

Any comments on the Fed's regular provision of 'liquidity' to the interbank financial system will also be scrutinised closely because its post-September re-expansion of its balance sheet has steadily increased the supply of Dollars on the market, which has the potential to be a headwind for the U.S. currency. 

Markets are betting the Fed delivers at least one further interest rate cut in 2020 although the bank itself has said it would require a "material change" of its outlook for steady GDP growth of around 2% in 2020, with near-target inflation and full employment in order to prompt any further policy action. And so far the economy appears to be delivering the Fed's forecasts on all of those scores.

"We are slightly below the consensus which could be bearish for the USD and bullish for fixed income," says Katherine Judge, an economist at CIBC Capital Markets. "Growth in the US economy appears to have slowed to just below potential at 1.8% in Q4, refl ecting a deceleration in consumer spending to a more sustainable pace, and a fall in business investment, concentrated in the structures component. Lower interest rates appear to have lifted residential investment, however, providing a partial offset."

U.S. GDP growth actually accelerated in the third quarter when it rose from an annualised 2%, to 2.1% and markets are looking for it to have risen further to 2.2% in the final quarter when year-end figures are released Thursday. 'Nowcasting' estimates from the Federal Reserve Bank of New York support the idea of such an uptick, with the growth rate implied by the weekly nowcasting reports having trended sideways at around 1.22% since late December. 

The New York Fed's nowcast suggested throughout October that GDP growth was likely to have declined in the third quarter, with highest estimate recorded during that month being just 1.3%, only for the actualy growth rate to have ticked slightly higher to 2.1%. And throughout this January the nowcast has been remarkably steady at around 1.22%, which may mean an upside surprise to the consensus could even be likely.  

"Better than expected economic data from the US and Germany since the start of this year has encouraged speculation that the global economy may be healing," says Jane Foley, a strategist at Rabobank. "While there may be further upside potential for risky assets in the near-term, it is our view that optimism will fizzle and burn away during the course of this year. Consequently, even though we expect the Fed to cut rates further this year, we expect that downside potential for the USD will be well contained.

The Dollar remains one of the highest yielding major currencies and given its dual role as a so-called safe-haven, it's well positioned to benefit not only from the possibly steady hand of the Fed, but also mounting concerns about the spread of China's new coronavirus. Those concerns made the safe-haven Japanese Yen the best performing major currency last week, with the Dollar in third place behind Pound Sterling. 

"As at 2400 hours on 25 January, the National Health and wellness board had received a cumulative report of 1975 confirmed cases in 30 provinces (districts, municipalities) and 324 existing severe cases.Cumulative deaths 56 cases, cumulative cured discharged 49 cases.There are 2684 suspected cases," says China's National Health Commission in a January 26 notice.

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