Euro-to-Dollar Week Ahead Forecast: Rally Sandwiched by Risk

File image of Volodymyr Zelensky. Copyright: European Union.

The Euro to Dollar exchange rate (EUR/USD) could go above 1.1735 this week.

The Euro's half-per cent rise on Friday against the Dollar was a firm reminder that the single currency continues to find strong buying interest on any pullbacks.

Because the EUR/USD is trending higher again this August, a move above 1.1735 resistance is possible this week, although success here will depend on whether or not Ukraine and Russia make progress towards a peace deal and whether Jerome Powell verifies market expectations for a September interest rate cut.

The week will be sandwiched between Ukraine peace talks on Monday and an address by Federal Reserve Chair Jerome Powell to the Jackson Hole Economic Symposium on Friday.

Ahead of these risks, a study of the chart shows the Euro-Dollar pair is on the rise again.

On this basis, our Week Ahead Forecast model is constructive, with EUR/USD sitting above the nine-day exponential moving average (EMA), which is currently located at 1.1664 and is rising. While above here our Week Ahead Forecast is bullish.

The Relative Strength Index (RSI) is above 50, although it is looking a bit flat at present, perhaps reflecting the consolidation in the exchange rate that we saw last week.

That consolidation of the rebound is captured by the tramlines of the 61.8% and 78.6% Fibonacci retracement levels of the July-August decline:

Nevertheless, the dashboard is flashing green and we favour a move above 1.1735. For upside continuation, we need to move through 78.6% and from here the July 24 high at 1.1788 becomes visible.

Technicals aside, we have some important risks to consider.

First is Monday's meeting between U.S. President Donald Trump and Ukrainian President Volodymyr Zelensky. Already, markets expect progress as measures of market volatility have fallen notably over recent days, which should bolster the Euro against the U.S. Dollar.

"It was the surge in oil and gas prices in the summer of 2022 – and the negative terms of trade shock to the eurozone – which sent EUR/USD below parity. Unless Ukraine-Russia negotiations really fall apart and Trump's 'over-familiarity' with Putin does a U-turn to send oil prices higher, we think benign global conditions can keep EUR/USD gently bid," says Chris Turner, head of FX analysis at ING Bank N.V.

Midweek Eurozone inflation data are due, and they should show inflation is comfortably within the European Central Bank's 2.0% target, although it would take a significant below-consensus surprise to convince the market the ECB will deliver more interest rate cuts from here.

The element of surprise is lost, however, as all the major European countries will have delivered their domestic data, which means the Eurozone-wide number will already be expected.

An element of surprise is more likely to be found in the PMI survey numbers for August, due on Thursday. July's PMI's surprised to the upside and revealed an economy that is growing again, which boosted the single currency. Another repeat performance could help it go higher again.

However, it's the Dollar side of the equation that really matters for Euro-Dollar. All eyes on Jackson Hole in Wyoming on Friday when Federal Reserve Chair Jerome Powell speaks.

The assumption is that he will verify market bets for a 25 basis point interest rate hike on account of cooling U.S. labour markets. However, he will reject hopes for a 50bp move on account of still-high inflation.

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Jackson Hole has a history of being significant for markets as the Fed Chair has often used the address to signal shifts in policy.

"At last year’s Jackson Hole Economic Symposium, Fed Chair Powell sent a clear signal that the time had arrived to start lowering rates which was followed by a larger 50bps rate cut at the September FOMC meeting," says a currency note from MUFG Bank, out Monday.

Last year Powell said "the time has come for policy to adjust. The direction of travel is clear" with inflation on a "sustainable path" toward their target.

"At this month’s Jackson Hole Economic Symposium market participants will be listening closely to see if Chair Powell validates pricing for rate cuts to resume next month. The risk is that Chair Powell refrains from providing a clear signal over the timing of the next rate cut giving the Fed more time to continue assessing incoming data before the September FOMC meeting. It could help to dampen downward pressure on the US dollar in the near-term," says MUFG.

However, analysts at ING Bank think the address will lean dovish on the Dollar.

"Benign conditions look set to continue, given a quiet week for data and focus on Friday's Jackson Hole symposium – presumed dovish. Expect the dollar to stay generally offered," says Chris Turner, head of FX analysis at ING Bank N.V.

"Confidence that the Federal Reserve is ready to cut two or three times this year sees investors happy to remain long risk assets. Volatility is low across asset classes, credit spreads remain tight, and emerging markets are in demand," he adds. "This is a negative backdrop for the dollar, and we expect it to remain gently offered this week."