Euro to Dollar Week Ahead Forecast: Peak Weakness

• EURUSD remains supported from technical perspective
• Eurozone inflation is key Eurozone risk event
• Watch the Federal Reserve decision midweek
• U.S. jobs report to set the tone ahead of weekend

Image © European Central Bank

The Euro appears to have passed a moment of 'peak weakness' against the Dollar, with the technical setup hinting that it can remain supported in a week that is packed with data releases and a Federal Reserve interest rate decision.

Christopher Romano, a Reuters market analyst, says the technical setup behind Euro to Dollar exchange rate appears to have turned constructive after the pair broke out of a downtrend that saw 11 consecutive weeks of losses.

"EUR/USD broke above the downtrend line off July's peak and has remained above it since and a monthly doji candle has formed. Those signals suggest EUR/USD's fall from July's high may be at an end," says Romano in a recent analysis.

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Shaun Osborne, Chief FX Strategist at Scotiabank, says modest gains from support in the low 1.05 area in the latter part of last week give the short-term chart a slightly positive tinge.

However, he would like to see more short-term gains to give a bit more confidence that the rebound can extend over the coming days.

"At this point, the best we can say from a technical point of view is that the EUR sell-off has stalled," says Osborne.

Price action in the previous week was instructive as the Euro-Dollar showed resilience despite the European Central Bank's decision to hold interest rates on the day the U.S. posted a surprisingly strong GDP print.

"The euro has reached a point of weakness, where only very negative catalysts can trigger further depreciation. So, we continue to see solid support around 1.04 against the US dollar, and expect EURUSD to trade in a 1.04–1.08 range in the coming months," says a note from the strategy desk at UBS.

Above: "EUR-USD rate spread seems to point at a more balanced EUR/USD outlook in the near-term" - Crédit Agricole.

The highlight for the Euro in the coming week is the release of Eurozone inflation figures for October, which could help the market firm expectations for the increasingly important December 14 European Central Bank (ECB) interest rate decision.

Ahead of the all-Eurozone numbers on Tuesday come the regional releases, with Germany's North Rhine Westphalia releasing its number at 07:30 GMT on Monday.

Often this can elicit a reaction as it gives a sense of where Germany's nation figure - due at 14:00 GMT - will land.

Watch Spanish CPI inflation due at 09:00 as this is oftentimes considered a leading indicator for Eurozone inflation in the next one to two months owing to Spain's rapid price passthrough rate. Markets will be looking for a further decline from September's 3.5%.

Tuesday's Eurozone PMI is expected at 11:00 GMT on Tuesday, with the headline rate seen at 3.4% year-on-year, down from 4.3% previously. The all-important core CPI is expected to come in at 4.2%, down from 4.5%.

The rule of thumb is that a strong set of inflation figures raises the odds of the ECB striking a 'hawkish' tone in December, which is supportive of the Euro.

But faster-than-expected declines could well see the ECB highlight relief that prices are comfortably on course to fall back to target.

This would raise the odds of a rate cut in H1 2024, in turn potentially weighing on the Euro.

Also due for release alongside the inflation figures on Tuesday are preliminary Eurozone GDP numbers for the third quarter, where markets look for a 0.2% increase year-on-year in the second quarter.

The quarter-on-quarter figure is expected at -0.1%, and the Euro would likely find some support on any reading that comes in higher.

Expect softness if the data disappoints, as this would only further bolster the case for a 'dovish' December ECB.

Dollar Week Ahead: Fed Decision and Payrolls

The theme we are picking up with the currency strategy community is that because the U.S. exceptionalism story is now well understood, it will take some significant 'hawkish' developments in U.S. data and Federal Reserve guidance to boost the Dollar in the short-term.

The first major test for the Greenback comes on Wednesday with the release of the ISM manufacturing survey at 15:00 GMT, where markets are looking for further signs of U.S. economic resilience. The consensus is set for a reading of 49, although suspicions will be to the top end given the recent trend of strong data outturns.

At 19:00 GMT the Federal Reserve gives its latest interest rate decision, which is widely anticipated to be a no-change call. The market-moving element of the event will be the guidance regarding a potential December interest rate hike.

"The credibility of any 'hawkish skip' would depend on the FOMC's assessment of the evolving economic and inflation outlook as well as any indications that the recent rise of long-dated UST yields reduces the need for further monetary tightening from here," explains Crédit Agricole.

Should the market price in another rate hike, the Dollar could advance.

Key to that December decision will be Friday's labour market report, where the market is poised for a non-farm payroll reading of 172K for October and an unemployment rate of 3.88%.

Currency strategists say that the biggest Dollar reaction would likely be to the downside on any disappointment given how well subscribed the U.S. outperformance trade has now become.

"We think it would take a blockbuster print and a very strong reaction from the Fed to drive the USD higher, after the currency’s surge in recent months," says a note from the currency strategy desk at UBS.

"We think that it would take a significant positive data surprise to encourage the markets to start pricing in further tightening in a boost to the USD," says a weekly currency research note from Crédit Agricole. "Potential data disappointments could cement the market expectation that the Fed tightening cycle has peaked and encourage profit taking on stretched USD longs."