Euro-to-Dollar Week Ahead Forecast: Fib Barrier Still in Play
- Written by: Gary Howes
Image © European Central Bank
The Euro-to-Dollar exchange rate (EUR/USD) looks like it wants to go higher, but a technical barrier is frustrating gains.
The Euro is in a short-term phase of strength against the Dollar, which is surprising given the ongoing uncertainty pertaining to French politics.
Next week will see a confidence vote in France's National Assembly, which should see the Francois Bayrou government fall, triggering a period of uncertainty in one of Europe's most indebted countries.
Analysts note that markets are nervous about France's debt outlook, and that in the past it has triggered periods of EUR weakness, with one telling us he thinks a test of 1.14 becomes possible if the situation gets messy.
However, the market learnt a lot from the collapse of Michel Barnier's government in December. Back then the Euro fell but soon righted itself as it became clear France has the political mechanisms that allow it to plod on, even if the government of the day has a limited mandate to initiate meaningful change.
Given that we have a template, markets appear a lot more sanguine heading into next week's events.
From a foreign exchange perspective, this serves to remind us that it's the Dollar that wags the Euro-Dollar's tail, and how the exchange rate ends this week will depend on what the Greenback does.
August saw the Dollar soften as markets raised bets the Federal Reserve would cut interest rates in September. A weakening economy allows this reduction in lending costs, and Friday's U.S. jobs report should bake in that cut, and open the door to further cuts in the future.
The market looks for 78K non-farm payrolls to have been added, which speaks of a softening employment situation, which the Fed will remedy with lower rates.
However, with markets already anticipating a soft outcome, any upside surprise could trigger a Dollar rally and put Euro-Dollar on the defensive.
A look at the charts shows the pair has been rising of late, but we are back at a level of technical resistance in the form of the 78.6% Fibonacci retracement of the July slump in EUR/USD at 1.1735.
As we can see in the above, this Fib level marks the upper end of a mini range that EUR/USD has struggled to break. It's a technical cap and we are wary that it will hold in the coming days.
However, a look at the broader technical setup suggests to us that it should ultimately give way: the pair is above the nine-day exponential moving average at 1.1672 which leaves our Week Ahead Forecast model constructive.
A move through the 78.6% Fib level at 1.1735 opens the door to the July 24 high at 1.1788, ahead of an eventual retest of the 2025 peak at 1.1830.
For the peak to come back into play, we would need a steady erosion in the dollar's value to continue, most likely linked to a gradual slowing of the domestic economy as the effect of tariffs starts to bite.
Rising concerns about the independence of the Federal Reserve will meanwhile also play a part in undermining the currency.
Although the first half of 2025 was characterised by frantic USD selling, we would anticipate any further weakness would be more of a slow-burn story, that puts fresh multi-year highs in the frame for later in the year.
