Euro-to-Dollar Week Ahead Forecast: Staying Well Supported

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The euro to dollar exchange rate (EUR/USD) has unwound overbought conditions.

EUR/USD trades at 1.1855 at the start of the new week, having retraced from last week's peak at 1.2083, which was also a new four-year high. Gains came on the back of a major USD blowout that left it oversold and EUR overbought on a technical basis.

The rally took it to a 'seminal' barrier in the form of the 200-month moving average, described here as a "seminal" level, which would have required a leviathan of an effort to overcome.

 The subsequent decline is therefore perhaps a necessary reaction to uncomfortably overbought conditions.

The RSI has duly mean-reverted lower in line with the exchange rate and EUR/USD starts the new week in better balance.

We forecast that the retracement peters out from here and that the euro retains support around 1.1850, which is the 38.2% Fibonacci retracement of the November to January rally at 1.1850.

However, should the selloff extend a little further, then the market targets 1.1758, which would be the 50% retracement and the location of resistance to the December rally.

More broadly speaking, the uptrend is still higher, but we doubt the rally will be engaged in earnest anytime soon.

With a big repricing in the USD behind us, the coming week offers opportunities for traders to engage with fundamentals.

The marquee U.S. non-farm payrolls report lands on Friday and this should determine future U.S. interest rate developments.

Consensus expectations look for around 65,000 jobs to have been added in January, with outcomes below that threshold typically weighing on the dollar and stronger readings lending it support.

Ahead of the U.S. jobs report, the European Central Bank decision lands on Thursday, but there's zero chance of a rate cut or hike.

In fact, the ECB is not expected to make a move at all this year. Therefore, expect any reactive currency moves to the ECB decision and guidance to quickly fade.