Euro-to-Dollar Week Ahead Forecast: Fed Can Open the Ceiling's Door

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The euro-dollar pair is blocked by resistance, but the Federal Reserve can open the door to new highs.

The euro to dollar exchange rate (EUR/USD) remains frustrated by the 1.1785 level, which regular followers will note to be the 78.6% Fibonacci retracement of the July slump.

It's an area that has proven difficult for euro bulls to breach, and last Monday's Week Ahead Forecast looked for the resistance to continue frustrating gains. The call was ultimately right (the small blue arrow was annotated in last week's report):

The chart nevertheless shows upside momentum remains intact, with EUR/USD trading above the nine-day exponential moving average. In fact, the pair is above all its moving averages, simply telling us that it's on the move higher and that periods of weakness are merely consolidative.

The break higher could come this week if the Federal Reserve proceeds to cut interest rates and verifies market expectations that further cuts will follow in the coming months.

If so, then EUR/USD could be on for a test of 1.1798 ahead of the 2025 highs at 1.1830 later in the year.

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i - Based on average EUR/USD rate observed in July.

For this to happen, the Federal Reserve must signal a willingness to deliver as many as four to five further cuts before mid-year 2026. This is what is required to meet current market pricing, and would be consistent with a steady erosion of dollar value.

"After a frustrating few months for Dollar bears, we think the Dollar will resume its descent," says a weekly FX strategy note from Goldman Sachs. "Impending Fed cuts should catalyse a fresh leg of Dollar downside."

However, analysts at Barclays warn in their weekly FX strategy note that "a new catalyst seems to be required for a breakout from the summer's ranges."

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Their argument is that a lot is already 'priced in' by way of future Fed rate cuts, meaning there is an incredibly high bar that must be crossed to drive further weakness.

"With an estimated three 25bp cuts by year-end — starting at this week's Fed meeting — and c.150bp by the end of next year, however, even larger downside misses in employment statistics are required from here for policy to enter accommodative territory, which is a nontrivial bar to clear," says the note.

With this in mind, we wonder whether there is scope for markets to be disappointed by a more cautious take fromt the Fed midweek, in which case the dollar rallies and the EUR/USD remains restricted by that pesky 71.8% Fib level we spoke of earlier.