Euro to Dollar Week Ahead Forecast: (Limited) Comeback Time

• EUR/USD looking solid above 1.07
• USD strength starting to look a little tired
• But gains limited to 100 DMA
• Watch Eurozone PMIs this week

Image © Alfred Yaghobzadeh, European Commission Audiovisual Services

The Euro to Dollar exchange rate has found solid support at 1.07 and we hold an upside bias for the coming five days with the potential for a positive PMI surprise informing this stance.

The previous week showed us that the Dollar's 2024 run of appreciation is starting to look a little old in the tooth, with a series of above-consensus economic data prints unable to push Euro-Dollar below the 1.07 level.

This suggests a slightly improved near-term outlook for the Euro-Dollar exchange rate. "Short-term trend momentum favours a little more EUR strength in the short run. Support is 1.0755 and 1.0690/00," says Shaun Osborne, Chief FX Strategist at Scotiabank.

"EUR gains from the mid-week low are holding up and leave spot trading close to levels which could point to more sustained gains in the short run," he adds.

The FX desk at Goldman Sachs reports decent demand for the Euro against the Dollar in the wake of last week's U.S. retail sales numbers, suggesting a frustration that the EUR/USD decline stalled once again sub 1.0700. This led to some "trimming of what is arguably amongst the larger of FX positions out there," says Goldman Sachs.

Goldman Sachs traders report that EURUSD "seemed to find decent buying interest at the lows just below 1.0700".

Look for this support to continue in the coming week, particularly as the incredibly low volatility currently seen in FX points to little prospect of a significant breakdown in Euro-Dollar.

Above: EUR/USD at daily intervals, showing recent stability above 1.07, however, resistance at the 100-day moving average could frustrate advances. Track EUR/USD with your own custom rate alerts. Set Up Here

Any recovery in the Euro-Dollar over the coming days will likely be restricted to near the 100-day moving average, located at 1.08; we note the pair has failed to close above here since February 02 and tests of this level have been rejected throughout the month thus far.

There is some decent data to chew over from the Eurozone this week, with the focus falling on Thursday's preliminary PMI survey for February (09:00 GMT).

The market looks for the Eurozone services PMI to print at 48.7, manufacturing at 47 and the composite at 48.3; recall anything below 50 signals contraction. The rule of thumb is the Euro can come under pressure if the data undershoots.

"Advance PMIs next Thursday could be crucial for rates and FX and any renewed weakness in advance PMIs in Europe could see the dollar advance more notably," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG Bank Ltd.

Image courtesy of UniCredit.

But with so much economic gloom priced into the euro, we reckon it would take a whopping undershoot to really get the currency falling. Instead, risks are to the upside with a greater reaction function to any better-than-expected prints.

In a weekly assessment, UBS says flash PMIs may show signs of a potential rebound in activity, "which would be positive for the euro... economic data surprises have been a bit stronger in recent weeks, which typically helps the common currency".

Also on tap is the release of German GDP numbers on Friday, where a -0.2% quarter-on-quarter print is expected for the fourth quarter, which would confirm a technical recession owing to Q3's -0.02% print.

Also due Friday is the more timely IFO survey of economic conditions and expectations, which should offer markets clues as to whether the worst has passed for Europe's biggest economy. (Current assessment expected at 87, expectations at 83.80).

"We expect the Ifo Business Climate Index to rise to about 86.5 in February after two consecutive declines. Such an increase is likely to have been driven by both the business expectations and the current situation components," says a note from UniCredit Bank.