Euro-to-Dollar Week Ahead Forecast: ECB in Focus
- Written by: Gary Howes
Image © European Central Bank.
The Euro's uptrend is on pause, but it is by no means capitulating against the Dollar.
The Euro to Dollar exchange rate (EUR/USD) has exited a strong uptrend for the time being, with a shallow pullback expected to evolve over the coming days.
Our Week Ahead Forecast model has been watching the uptrend support line, denoted by the blue line in the chart, located at 1.16:
Above: EUR/USD at daily intervals.
As we can see, the uptrend line was breached last week, which signals that the trend is losing momentum. This is corroborated by the Relative Strength Index (RSI), in the lower panel, which has flattened out nearby the neutral 50 level.
We also drew a graphical support line (in turquoise) last week, and note that it has provided some guidance, with the exchange rate failing to register a daily close below here.
The key question for the coming days is whether or not that horizontal support line holds. If it doesn't, then we will have confirmation that the summer pullback in Euro-Dollar is still with us and has further to run.
However, if the exchange rate can hold support above 1.16, then it will be highly likely that the uptrend restarts sooner rather than later and 1.18 comes into focus again.
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"I am confident the pair will head towards 1.20 later this year, suspect the peak will be around 1.25, in line with the 2018 and 2021 peaks, and I doubt we will see 1.30 for the foreseeable future," says Kit Juckes, FX Strategist at Société Générale.
To be sure, we don't see much happening in the coming week as FX markets appear to be rather listless at present.
While there are no major U.S. calendar events, the EU and Japan will have to agree or reject new trade accords with the U.S. in the next ten days as the August 01 deadline imposed by U.S. President Donald Trump approaches. Headlines on the matter could inject some short-term volatility into the market.
The textbook says that trade agreements will benefit the U.S. Dollar, as it will lower the potential for negative domestic economic shocks that import tariffs pose.
"The U.S. also reportedly wants to apply a universal tariff on EU goods higher than 10% with only few exemptions. An escalation of retaliation between the U.S. and EU can push EUR/USD up if market participants focus on the US economic fallout and the 'sell America' narrative regains momentum," says Carol Kong, FX Strategist at Commonwealth Bank.
File image of ECB President Christine Lagarde. Photo by Sanziana Perju / European Central Bank.
The main calendar event of the week is the European Central Bank (ECB) meeting, which should see interest rates maintained at current levels as it exits its rate cutting cycle.
In June, President Lagarde said the ECB well placed to navigate the current uncertain environment, confirming further cuts were not guaranteed.
"We expect the ECB to keep the deposit rate at 2.0% at its meeting on 24 July, and we do not anticipate any further interest rate cuts beyond that. However, the risk to this call stems from the possibility of an escalation in the trade dispute between the European Union (EU) and the US, and a further appreciation of the euro against the dollar," says Felix Schmidt, an economist at Berenberg Bank.
If the ECB is done with rate cuts, the Euro will be well supported from an interest rate differential perspective going forward.
However, most market participants think it will cut rates again in September for the final time. Even if it does, the bigger picture is that the the U.S. will likely see more interest rate cuts in the coming months than the Eurozone will, which is supportive of Euro-Dollar.
