Euro-Dollar Week Ahead Forecast: 1.10 A Push Too Far?

  • EURUSD technical setup stays positive
  • Further gains to 1.10 possible
  • But beware waning momentum
  • Eurozone inflation bears watching
  • As does Thursday's U.S. data dump

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The Euro to Dollar exchange rate is set in a constructive technical setup, and a push to 1.10 is being anticipated by some analysts; however, it won't be smooth sailing this week given a number of important U.S. data releases are due, as are Eurozone inflation numbers.

Although Euro-Dollar has pushed higher, momentum appears to be slowing, with last week's 0.22% gain rather overshadowed by the previous week's 2.0% rally.

Nevertheless, we are told that the setup is still constructive as a new trading week begins.

"EUR/USD could push higher if Eurozone inflation weakens more, since this will likely further raise the appetite for European stocks and provide indirect support to the risk-sensitive euro. Thus, a run towards 1.10 handle on the EUR/USD remains likely," says Fawad Razaqzada, an analyst at City Index.

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Shaun Osborne, Chief FX Strategist at Scotiabank, says Euro-Dollar appears to be more consolidative at the moment, with last week's marginal gain suggesting "some building resistance to the EUR advance around noted retracement resistance at 1.0960 (61.8% Fibonacci of the H2 EUR slide)."

"Underlying trend dynamics remain bullish, however, and still rather suggest limited scope for EUR weakness and ongoing pressure for EUR gains to extend. Above 1.0960 targets 1.11. Support is 1.0870/75; loss of support here could see corrective EUR losses towards 1.0775," adds Osborne.

In the Eurozone, the European Central Bank President Christine Lagarde testifies to the European Parliament's Economic and Monetary Affairs Committee on Monday, which could attract some attention in financial circles.

However, we expect her to maintain a line that it is too soon to talk about interest rate cuts at the ECB.

The most important data release is Eurozone flash CPI inflation for November, due Thursday and expected to show further falls in the headline and core measures to 2.8% and 3.9%, respectively.

Should the data beat expectations, expect the market to reverse some of its bets for ECB rate cuts, which have grown of late and would boost the Euro. But the Eurozone's CPI reporting cycle begins a day before with the release of German state-level figures, which have often set the tone for the market.

Spain, often considered a leading indicator for broader Eurozone inflation trends, also releases figures on Wednesday, which means FX action could commence midweek.

"Given how aggressive market expectations have become, the EUR could benefit from any upside inflation surprises and/or further ECB pushback against rate cut expectations, especially if these help boost its rate appeal," says Valentin Marinov, Chief FX Strategist at Crédit Agricole.

Above: "ECB rate expectations – four rate cuts priced in for 2024" - Crédit Agricole.

"A downside miss on the regional CPIs (Wednesday) or Eurozone wide CPI (Thursday) could cap the gains. We estimate headline CPI decelerated further in November to 2.7%/yr. A slowing in inflation across both goods and services is possible. Of the economies that we track, the Eurozone is one of the weaker ones. We expect the Eurozone to experience a recession, or already be in one, which can ultimately weigh on EUR/USD," says Carol Kong, an analyst at Commonwealth Bank.

The fundamental outlook rests heavily with the U.S. this week, where a busy calendar should give further signs as to whether or not the economy is cooling sufficiently to meet expectations for U.S rate cuts in 2024.

Rising expectations for such cuts have recently boosted global investor sentiment, simultaneously supporting the pro-risk Pound and undermining the safe-haven Dollar.

Weekly jobless claims on Thursday bear watching as investors will question whether last week's drop was a blip, meaning another surprise undershoot could cause some nerves that support USD.

Personal spending growth is also due on Thursday and is forecast to have eased to 0.2% in October after the substantial 0.7% rise in September.

The Fed’s preferred PCE inflation data is due on Thursday and is likely to mirror the CPI release and show falls in both the headline and core measures to 3.1% and 3.5%, respectively.

Also, watch Federal Reserve speakers make their case ahead of the pre-FOMC blackout period. The highlight will, of course, be Fed Chair Jerome Powell, who speaks twice on Friday.

"While the Fed is highly unlikely to change interest rates at its last policy meeting of the year next month, markets will be listening carefully for how strongly policymakers push back against expectations for lower interest rates in 2024," says Hann-Ju Ho, Senior Economist at Lloyds Bank.