Euro-to-Dollar Week Ahead Forecast: Pulling Back

U.S. President Trump is ratcheting up the heat on trade partners again. Official White House Photo by Abe McNatt.

The Euro can retreat against the Dollar before resuming higher.

The Week Ahead Forecast model looks for some consolidation at lower levels for the Euro to Dollar exchange rate (EUR/USD).

Having risen to 1.1829 last week, the pair is well due a pullback to consolidate what has been an impressive rally that has started to look a little extended.

A return to the rising trend line, which is indicated in the below chart, is therefore a possibility for the short-term:

Above: Euro-Dollar at daily intervals.

We would target 1.17 in the coming week, based on the view that the rally needs to retrace. One-week-ahead risk reversals, which are used to gauge directional bias in the exchange rate, have been scaled back to 0, which suggests traders are turning more cautious on the rally near-term.

Bullishness on Euro-Dollar upside also slipped across the longer-term timeframes, suggesting less conviction in the rally relative to the past two months, raising questions as to whether 1.20 will be tested anytime soon.

Global stock markets are lower and the Dollar is higher on Monday, with investors showing some unease about the increase in negative trade tariff headlines that have come through over recent days.

"I am pleased to announce that the UNITED STATES TARIFF Letters, and/or Deals, with various Countries from around the World, will be delivered starting 12:00 P.M., Monday, July 7th," said U.S. Donald Trump on his Truth Social platform on Sunday.

Those partners lucky enough to be at the negotiating table will be told that "if you don’t move things along, then on August 1 you will boomerang back to your April 2 tariff level," said U.S. Treasury Secretary Scott Bessent.

Trump meanwhile also threatened additional tariffs on nations aligning themselves to the BRIC bloc, which is lead by China. "The latest interesting development in these negotiations is Trump saying that those aligning with the BRICS group of nations will face an additional 10% levy. This sees the CNY, INR and the rand trade softer to start the week," says Susan Correia, an analyst at South Africa's Nedbank.

This all suggests that the final settlement on tariffs that some investors had been hoping for might never arrive.

Recall that tariff uncertainty is supposed to be good for the Euro at the expense of the Dollar; this has been the playbook all year.

However, that this isn't holding true on Monday might signal that this trade is losing its strength, and that the Dollar's traditional safe-haven characteristics are starting to reassert.

A big reason for this is that incoming U.S. data increasingly shows little economic damage from tariffs and associated uncertainty.

The coming week will be short on economic drivers, leaving markets free to obsess over tariff headlines and query whether they are that bad for the U.S. This opens the door to further Dollar recoveries.