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The euro looks set to hold its ground against the dollar this week, with a rebound on the cards if French nerves settle.
The Euro to Dollar exchange rate made a shaky start to the new week, falling in early Asian trade before paring its losses by the time London walked in, and we look for it to hold above 1.1150 in the coming days.
Yet energy price anxieties and unrest in France will limit the euro's upside, and the bear case stays intact on a multi-week view.
From a technical perspective, the RSI - seen in the lower panel of the chart - has climbed out of oversold territory, suggesting the downside momentum behind the September selloff is fading:
EUR/USD daily chart. Image © Pound Sterling Live, chart created with TradingView.
EUR/USD trades at 1.1232 at the start of the new week.
The pair fell to 1.1113 on Wednesday, its lowest level in over a year, before recovering to 1.1269 on Friday.
Wednesday's dip took the pair beneath 1.1150 intraday, but the daily close came back above it, and no session this month has closed beneath that level, suggesting buyers are defending it.
The RSI spent the first half of October below 30, the oversold threshold, and now reads 39 as the pair lifts off its lows.
The 21-day moving average - the blue line - has fallen steeply since the start of September and now sits just above spot at 1.1281. Because it is falling so quickly, the pair can close the gap simply by holding its ground, and a daily close above the average would be the first since the middle of September.
The decline from August's high at 1.1711 has been steep, and we think a lot of bad news is now in the euro's price.
Tactically, that leaves a rebound offering an attractive risk-reward profile this week, and a daily close beneath 1.1150 would change our Euro to Dollar forecast.
So this is by no means a call for a turn in the broader trend, which points lower while the euro carries its current burdens.
Last week's call for short-term tactical upside came good late in the week, although the path ran lower first: the pair breached the 1.1135 level we flagged before turning higher, and the recovery stopped well short of our 1.1361 objective.
Weekend Unrest Adds to France's Risk Premium
Weekend rioting across France, the worst urban unrest the country has seen in years, lands as the government tries to steer its 2027 budget through a divided parliament.
How does French unrest reach the euro? Investors demand a higher premium to hold French government debt when political risk rises, widening the gap between French and German borrowing costs, and the market reads that wider spread as stress on the eurozone's finances, which weighs on the single currency.
The spread between French and German ten-year yields stood near 140 basis points last week, down from almost 160 the week before.
"A lack of setback in the French budget process could come as a greater relief than still resilient Eurozone leading indicators," say strategists at Crédit Agricole CIB in their FX Weekly of 16 October.
The euro is also a net energy importer's currency, so elevated oil and gas prices act as a further drag on the eurozone's terms of trade and limit how far any rebound can run.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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Talk to a specialistEurozone PMIs Are the Calendar Highlight for Euro-Dollar
Friday's flash PMI surveys for October are the week's calendar highlight for EUR/USD, with the market looking for the composite reading to ease to 52.5 from 53.1.
A reading above consensus would signal the eurozone economy is weathering higher borrowing costs and support the euro, while a miss would add to the pressure.
The European Central Bank meets on 29 October, and market pricing shows almost no chance of a hike at that meeting, while almost two hikes are priced by the middle of 2027.
On the dollar side, the U.S. flash PMIs are also due Friday, where the market looks for 55.5 in manufacturing and 57.9 in services, and the Federal Reserve is in its blackout period ahead of its 28 October decision.
Market-implied odds of an October Fed hike fell below 15% after Fed Chair Kevin Warsh offered no signal of urgency at the IMF meetings in Bangkok last week.
With the Fed quiet and the October hike largely priced out, the dollar has lost a near-term source of support. On balance, that is consistent with our Euro to Dollar forecast of a hold above 1.1150 and a modest rebound this week.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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