Euro-to-Dollar Week Ahead Forecast: Inflexion Point for EUR/USD

EUR/USD’s rebound from 1.1468 has stalled at the 21-day EMA, a level that has repeatedly capped rallies since September, leaving the pair at a crucial inflexion point.

The Euro to dollar exchange rate (EUR/USD) fell to its lowest level since April at 1.1468 last Wednesday, but it then put in a decent recovery, with a succession of daily advances taking us to 1.1555 on Monday.

Interrogating the daily chart reveals Monday's peak is at 1.1582, which also coincides with Friday's peak, putting a double failure at this level, indicating the presence of some selling interest here.

Closer inspection reveals that this is the location of the 21-day exponential moving average (EMA). The chart also reveals a descending trendline capping EUR/USD that coincides with the location of the 21-day EMA:

Rejections at the 21-day are consistent with behaviour seen since August: In August the 21-day EMA provided support to the euro, restricting declines and keeping alive an uptrend.

On September 25, the pair broke below the 21-day EMA, and a downtrend ensued.

The 21-day EMA has since acted as a ceiling to recoveries, and this is why the level will determine how the coming week plays out.

We are seeing the most recent recovery being tested here. Failure means the downtrend is intact, and an eventual break to fresh post-April lows and a move into the 1.13s beckons.

But a break above here and the outlook turns more constructive and a recovery into year-end becomes more likely.

The EUR/USD exchange rate is being driven by the dollar's behaviour, with very little input from the Europeans. Indeed, with the ECB expected to sit on current interest rate levels for some time, data from the bloc is nearly irrelevant.

Instead, it falls to the dollar to provide the action. Unfortunately, there will be no official U.S. data this week owing to the government shutdown, which deprives us of a previously scheduled inflation data release.

Nevertheless, "attention this week will turn to remarks from several Fed officials, which could provide new clues on how the central bank is balancing softening consumer confidence with a fragile labour market," says Konstantinos Chrysikos, Head of Customer Relationship Management at Kudotrade.

"Dovish remarks could weigh on both the dollar and yields," he adds.

Politics should also garner interest, as the weekend saw some progress towards ending the record-long government shutdown, with Senate Democrats voting through a procedural measure to advance a bill to pass funding.

"It looks like we’re getting closer to the shutdown ending," President Donald Trump said Sunday.

Senate Majority Leader John Thune said over the weekend that a bipartisan budget framework is taking shape.

There's no clear timeline for the reopening, which means the Fed's December policy meeting will happen without official data to assess.

However, sentiment would receive a boost on a reopening of the government, setting the scene for a recovery in stocks, which would weigh on the dollar.