Euro-Dollar Week Ahead: Setback Risks and a Shallow Dip

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Euro-dollar exchange rate could be on course to test 1.16 again, but buying interest is hard to extinguish.

The dollar strengthens at the start of the new week and risks sending the euro back to levels seen on March 03 near 1.16.

Dollar gains are underpinned by fears the looming U.S.-Iran ceasefire won't be renewed on Tuesday owing to developments over the past 24 hours that see the U.S. seize an Iranian ship.

It's too soon to say it's all going to fall apart and we think downside in euro-dollar will be limited by traders who know the U.S. and Iran both want a deal and that they will ultimately get there.

Trump has form in announcing deals in the seconds leading to a deadline and there's little reason to think that won't be the case again today.

If so, there's little reason to aggressively sell euros over the course of Monday, and lows near 1.1728 should be defended.

Worst-case scenario for the coming 24 hours is there's no ceasefire renewal and hostilities start afresh, creating a bid for the safe-haven dollar and raising concerns for the outlook of the eurozone economy.

Here, euro-dollar falls to 1.16, which is where the 200-day moving average is located. Nevertheless, this is a level that's still well above the crisis lows of early-March and speaks of a foreign exchange market that will expect a new ceasefire to eventually be agreed, ultimately followed by a reopening of the Strait of Hormuz.

That's the base-case expectation for the coming week: tensions followed by progress and confirmation that we're still ultimately on the road to peace.

For the euro-dollar exchange rate, that's a positive and suggests dips will be shallow and the euro will continue to find buying interest.

"We still expect the Dollar to depreciate over the coming weeks if energy markets normalise in line with our forecasts," says a weekly note from Goldman Sachs.

Analysts at ING say their baseline EUR/USD call for 3Q is a return to 1.18) and then 1.20 by the fourth quarter.

"While we now embed one ECB hike into our forecast, market pricing remains more hawkish (55bp) and we have revised our oil forecast higher. The backbone of our bearish USD view into year‑end remains our expectation of two Fed cuts, which should reopen USD hedging channels by easing front‑end rates," says ING in a recent note.

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