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Euro-to-Dollar Rate Week Ahead: Short-Term Uptrend, Big Events Lie Ahead

- Pair has rapidly risen to 3-week highs above 1.1800

- Recent loss of momentum not enough to reverse the trend

- Bullish and bearish signals contradict

ECB to be key for Euro exchange rates this week

© European Central Bank, reproduced under CC licensing

The EUR/USD exchange rate has entered a short-term uptrend, however we have noted the move to be losing some of its earlier momentum.

Nevertheless, from a purely technical perspective, we remain on balance bullish and expect it to continue rising on the condition that the market breaks to a new high.

Therefore, a break above the 1.1840 highs would probably confirm an extension up to the next target at 1.1925, just below the 50-week moving average (MA) at 1.1947.

EUR to USD short-term chart

We target the 50-week because it is expected to present a formidable obstacle to the young uptrend and probably result in the rally stalling, or possibly even reversing and moving lower.

EUR to USD week chart
As can be seen on the weekly chart the trend had been sharply down until the exchange rate formed a bullish hammer reversal candlestick the week before, which gained confirmation after the strong positive gains in the following week.

Our only misgiving is the bearish 'death cross' which has formed on the daily chart after the 50-day MA crossed below the 200-day MA. When this cross happens, which is quite seldom, it is usually a sign lower prices are on the horizon. 

EUR to USD Day chart

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Euro this Week: ECB, ECB, ECB

It's all about the European Central Bank (ECB) for the Euro in the week ahead.

Thursday, June 14 should give guidance on when the Bank finally plans to exit their quantitative easing programme.

The Euro exchange rate complex caught a bid this week when ECB member Peter Praet gave a clear indication that the coming meeting was "live" i.e. a big message would be delivered.

So, will the event keep the Euro rising? Not necessarily says Andreas Steno Larsen, an analyst with Nordea Markets:

"The market could easily get further carried away on this story ahead of the ECB meeting next week. Especially since the market usually tends to overreact I) when it “smells blood” on the story that the next step in the tapering process is closing in and II) high headline inflation (due to oil effects) almost always leads to exaggerated market assessments of the implications for monetary policy."

Nordea Markets prefer a “buy the rumour, sell the fact” approach ahead of the ECB meeting and find it difficult to see a scenario where the ECB ultimately surprises hawkishly compared to the expectations that will be built up over the next week.

So, while the message should ultimately be a pro-Euro one, on the day the market could well dump the currency.

Whatever the outcome, volatility in the exchange rate during and after the event is assured.

 

The US Dollar this Week: All About the Fed

The Dollar's moves are currently more a function of overall risk sentiment on global markets, which are in turn largely being fed by the United States president Donald Trump.

The Dollar tends to benefit when stock markets are selling off, owing to the safe-haven features of the gargantuan pool of US Dollar liquidity that exists across the world. When traders are running scared, they liquidate and buy Dollars.

Watch what Trump says at the G7 summit this weekend - will he double-down the route of tearing up global trade treaties while imposing further tariffs? If yes, expect sentiment to struggle next week.

But, there is the US Federal Reserve to keep an eye on mid-week where another interest rate rise is expected.

A rate rise is already expected, and therefore what matters for the Dollar are the future moves on interest rates that will likely be signalled by policy-setters.

"Ahead of the quarterly rate hike that the Fed will deliver next Wednesday, the big if is whether the dot plot will signal three or four hikes in total for 2018," says Andreas Steno Larsen, an analyst with Nordea Markets. "In the March projections only one FOMC member was needed to tip the balance from three to four in the plot. We judge that there is a relatively large probability that the balance is tipped in favour of four hikes in total in June."

This would help the Dollar catch a bid we believe.

"Given the current market pricing of Fed Funds futures the June hike is more or less a completely done deal, while four hikes in total for 2018 is far from priced in. In total just around five hikes for 2018 and 2019 combined are priced, which is why a tipped balance in the dot plot will likely spur a yield-positive repricing of the Fed Funds futures and likely also a moderately USD positive move in the FX space," says Larsen.

Analyst Katherin Goretzki with UniCredit Bank says, "this past week, the recent scratches in USD strength have deepened. A hike by the Fed next week is unlikely to provide support on its own as it is fully priced in, but a more-hawkish tone could help the greenback."

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