Euro-Dollar is Ready to Resume the Uptrend
- Written by: Gary Howes
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The euro is looking better supported at this juncture; it just needs something to spark an extension of the recovery.
And that spark might come from the release of U.S. inflation data, due at the end of the week.
The dollar will likely slide if U.S. inflation meets or undershoots expectations, prompting the euro to dollar exchange rate (EUR/USD) to extend its recent recovery to 1.1750.
The market expects CPI inflation to print at 3.1% in September, up from 2.9% in August, and core inflation is expected to land at 3.1%.
It goes without saying that an above-consensus print would boost the dollar as investors would have little choice but to lower expectations for future interest rate cuts, a development that would typically be considered supportive of the dollar.
"Investors may increasingly focus on the Fed’s emphasis on maintaining maximum employment, which would boost rate cut expectations as unemployment rises (as our economists expect) and weigh on USD," says a strategy note from Morgan Stanley.
Before the U.S. inflation print, the euro will be subjected to the Eurozone's various PMI survey data that will tell us how the bloc's economy performed in October.
A strong set of PMIs would bolster the Euro relative to the dollar as it would cement the case for the European Central Bank to sit on the current level of interest rates.
"EUR has struggled to sustain a break below 1.16 or above 1.18; we will be attentive to October PMIs for a potential catalyst for EUR to test the top or bottom of that range," says Morgan Stanley.
Although it's clearly up to the data to trigger the spark euro-dollar needs to test either 1.18 or 1.16, we would note the charts hint at a preference for a test of the topside, as there is some visible positive momentum.
The exchange rate was quoted as low as 1.1550 last week but has since recovered to 1.1665 at the time of writing.
This puts it on the converged 21-day and 50-day exponential moving averages and hints at something of a crossroads for the pair:
A couple of daily closes above these EMA's and there really is scope for an extension higher to 1.18.
"EUR/USD is stuck around the 50dma at 1.1695 following the brief pop above 1.17. Technically, the single currency must reclaim 1.1780/1.18 to convince doubters that the upward trend is back on track," says a note from Société Générale.
Morgan Stanley's FX strategists say they see the dollar providing the impetus to the move, as they expected to see USD weakness resuming as labour softness and falling real yields unwind recent strength.
"Rising Fed cut expectations and policy uncertainty should weigh further," add analysts.
The UBS Chief Investment Office says it expects lower U.S. yields to further weigh on the USD as hedging costs decline and the carry advantage of the USD fades with each rate cut.
"We maintain a Least Preferred view on the USD and forecast a mid-single-digit decline over our horizon, with EURUSD reaching 1.23, GBPUSD 1.40, and USDCHF moving toward 0.76 by mid-2026," says a recent note from the UBS CIO.
