Euro-to-Dollar Week Ahead Forecast: Dip Buying

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The Euro is in a buy-on-dips pattern, but U.S. CPI is a big risk.

The Euro to Dollar exchange rate (EUR/USD) is in a recovery sequence that is forecast to extend in the coming days.

Following a selloff in July, the pair has since rebounded and is in the process of reclaiming that lost ground. The recovery has stalled a little in recent days at the 61.8% Fibonacci retracement level of that July selloff:

The pair looks to be consolidating around here, and we think resolution will be to the upside, provided there is no significant surprise in Tuesday's CPI inflation report.

Why would resolution be to the upside? Stripping away the macroeconomic risks and looking at the technical indicators, momentum remains positive with the Relative Strength Index (RSI) above 50 and pointing higher (see the lower panel in the chart).

Spot is above the nine-day exponential moving average (1.1620), which is also pointing higher, which means our Week Ahead Forecast model is advocating for further near-term gains.

A retest of last week's 1.17 high is anticipated over the next five days, ahead of push to the 2025 high in the coming weeks.

"EUR/USD consolidated in the 1.16-1.17 range toward the end of last week, as the USD staged a modest rebound in the G10 space after depreciating for most of the week," says Mohamad Al-Saraf, Associate, FI and FX Researcher at Danske Bank. "We remain inclined to buy EUR/USD on dips."

The U.S. CPI inflation report will be the first of two such reports that will come before September's Fed meeting and will be crucial in adjusting expectations. Risks to Euro-Dollar is if rate cut expectations retreat following an above-consensus reading.

Headline CPI is forecast at 2.8% and core at 3.0%. Anything above here would tend to weigh on stocks and boost the Dollar.

But a significant above-consensus reading would potentially weigh on the Dollar as investors would fear the U.S. is entering a stagflationary period of low growth and high inflation.

Accelerating inflation means the Federal Reserve won't be able to step in to assist the economy with further rate cuts. It's possible that the Dollar will eventually come under pressure under such a scenario, but for now, higher inflation is deemed supportive of U.S. interest rates and therefore the Dollar.

If inflation undershoots expectations, then the stock market rally will extend and the Dollar will likely weaken, helping EUR/USD push above 1.17.

Image courtesy of Lloyds Bank.

Tariffs are expected to contribute to above-consensus inflation, but economists and market participants think tariffs will have a one-off effect, and are for now willing to look through the current impulse in rising inflation, judging it will soon fade.

In the Eurozone this week, we get inflation data from Germany and Spain. These data should give a decent indication of where next week's Eurozone inflation print will land, and could therefore impact the market.

The sense is that the European Central Bank (ECB) has more or less completed its rate cutting cycle, but there is scope for another rate cut in September.

If the odds of this happening were to increase this week, on account of the German and Spanish inflation data, the Euro would come under pressure, although any significant reappraisal of Eurozone interest rate expectations is unlikely just yet.