Euro-to-Dollar Week Ahead Forecast: On Break Out Watch
- Written by: Gary Howes
Image © European Commission Audiovisual Services
The euro to dollar exchange rate (EUR/USD) is breaking higher on Monday.
The pair rises to 1.1617 on the first day of December, meaning we're witnessing a renewed test of the 50-day exponential moving average (EMA).
If the pair can hold above here in the early part of the week the technical setup turns constructive and a run higher into year-end becomes likely.
We've witnessed three attempts to break above the 50-day EMA since October, and on all occasions they have failed, consistent with the descent in euro-dollar from highs at 1.19 in September to a low of 1.1468 on November 05.
November saw euro-dollar recover somewhat, but again that recovery was thwarted by the 50-day EMA.
However, it could be a case of fourth time lucky as we think there's a decent chance of the pair making the break and entering a new phase of appreciation.
This prediction rests on the view that the Federal Reserve will cut interest rates again on December 17, and then again on several occasions next year.
By contrast, the European Central Bank (ECB) will hold rates for the foreseeable future on account of a building economic recovery and firming inflation dynamics.
🔼 German bond yields outperformed last week after German inflation figures came in higher than expected. The yield on the 10-year Bund closed at 2.69%, up 1 bp.
Germany's HICP inflation figure saw a significant acceleration in November, rising from 2.3% in October to 2.6% in November (consensus at 2.4%).
💶 Elsewhere, real wages accelerated in Q3, from 1.9% y/y in Q2 to 2.7% in Q3.
The ECB's October survey meanwhile showed a slight rise in 1-year inflation expectations to 2.8% from 2.7%, reinforcing the view that the ECB is unlikely to cut rates in December.
With the ECB seeing no reason to move, and the Fed likely to cut rates in December, the divergence in EU-U.S. interest rates policy should provide an ongoing fundamental source of fuel for a euro-dollar rise.
💲The dollar is front and centre this week with a flurry of key data releases that are set to determine whether the mid-month Fed cut proceeds or not.
"EUR/USD has benefited from the recent underperformance of the USD that, in turn, seemed to be driven by US rate investors’ reassessment of the Fed policy outlook in response to dovish Fedspeak and weaker-than-expected US labour market data. We further note that the latest EUR/USD rebound seems to lag the widening of the EUR-USD rate spread in recent days and seems to point at further gains in the near term," says a note from Crédit Agricole.
What we're watching in the U.S.:
- Monday: ISM manufacturing PMI survey (consensus: 49K)
- Wednesday: ADP employment change (consensus: 10K).
Industrial production (consensus 0.1%)
Manufacturing production (consensus 0.1%)
ISM services PMI survey (consensus 52) - Thursday: Initial jobless claims (consensus 222K)
- Friday: Core PCE price index y/y (consensus: 2.8%)
PCE price index (2.8%).
Expect intraday volatility on these data releases. But by the end of the week we should get a sense as to whether we're leaning more heavily into a mid-month cut.
If yes, then euro-dollar should cruise higher to 1.1650-1.17. If not, then we're looking for a capitulation to 1.1550.
Bear in mind too that the month of December has historically been associated with notable USD selling across the board. FX seasonality analysis shows the currency has lost ground in c.70% of the cases in the past 25 years.
If history rhymes, as the saying goes, then seasonality is another reason to look for further euro upside.
