Euro to Dollar Week Ahead: Near-term Pressures Are On

• EUR/USD under pressure near-term
• But solid support could prevent meaningful weakness
• Watch Fed decision on Wed. for potential breakdown

Above: File image of Chair Jerome Powell, image supplied by the Federal Reserve.

The Euro to Dollar exchange rate enters the new week under the grey clouds of 2024's short-term downtrend, which could extend over the coming days if the Federal Reserve pushes back against rate cuts on Wednesday and if we receive a bumper U.S. jobs report.

But those looking for a stronger Dollar are facing some frustrations as Euro-Dollar finds some reliable support above the 1.0825-1.0850 area, and we are wary of a solid bounce off this area if the Federal Reserve is not forceful in its push-back against market expectations for a first rate cut to fall as early as March.

As we can see in the chart below, 1.0825 forms a horizontal line that has offered handy support to the Euro over recent months, while 1.0850 is where the 200-day moving average is located:

Above: Euro-Dollar at daily intervals showing the key technical levels that matter this week.

Should this support level fail to hold, a relatively rapid decline to the December lows of 1.0723 becomes possible.

The successful defence or failure of the aforementioned support zone will depend on two key events in the coming week: Wednesday's Federal Reserve decision and Friday's U.S. labour market report.

If the Fed pushes back on rate cut expectations and U.S. labour figures beat expectations, USD could see another leg higher, finally prompting a breach below 1.0825.

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However, we suspect it will require a decent above-consensus reading in Friday's data and a strong push-back by Federal Reserve Chair Jerome Powell to bring about such a move and trigger another leg lower in Euro-Dollar.

"The Fed is in a comfortable position with regards to both sides of its dual mandate. Cooling inflation warrants cutting rates towards neutral, but solid growth and labour markets allow the Fed to move gradually," says Antti Ilvonen, an analyst at Danske Bank.

He warns, however, that the recent fall in U.S. bond yields, as a result of expectations for generous rate cuts in 2024, leaves the market vulnerable to a pushback from Powell. This is because increased bets for rate cuts are reflected in lower bond yields, which weigh on lending rates.

Expectations, therefore, have real-world consequences that are at odds with the Fed's desire to loosen policy too soon.

"If Powell pushes back on the market notion of rapid rate cuts, as we anticipate, we could see a lower EUR/USD upon announcement. Our forecast for the cross is lower at 1.07/1.05 on a 6/12M horizon," says Ilvonen.