Euro-to-Dollar Week Ahead Forecast: Temporary Setback Possible

The Euro must unwind some recent strength ahead of a push higher.

The Euro to Dollar exchange rate (EUR/USD) is bullishly positioned at the start of the new week and we forecast ongoing upside.

However, we note that Friday's rally and the positive start on Monday leave it looking a little extended, and we would not be surprised to see a near-term pullback to allow some consolidation.

The strong run of Friday and Monday leaves EUR/USD deviating from its nine-day exponential moving average, which should trigger some mean reversion in a market that will be without any major news until midweek and the release of U.S. Producer Price Index (PPI) inflation numbers.

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

Gains also take the exchange rate to the top of a recent range - defined by 1.1735 - the 78.6% retracement of the July fall.

As the chart shows, the 78.6% Fibonacci retracement has capped gains through August and September, which suggests a decent level of resistance.

This resistance, when combined with the deviation from the nine-day EMA, leaves us looking for some consolidation.

The big question is whether this consolidation morphs into a deeper pullback that reinforces the range trade, or whether a break higher occurs, which would allow for the targeting of July 24 highs at 1.1788. (Set an order to automatically capture spikes and ensure you don't miss out on your ideal exchange rate).

Although technicals are ultimately constructive, whether a breakout of the range occurs or not will likely depend on the outcomes of an eventful week for FX, with a European Central Bank (ECB) decision and U.S. inflation numbers due.

But before this, we have the small matter of the French government, which is likely to be ousted in a confidence vote later today.

Ahead of the big moment, the Euro has proven relatively relaxed, and we think December's ousting of the Barnier government provides enough of a precedent to keep markets confident that France isn't yet at a point where it would destabilise the Eurozone.

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The ECB will likely keep interest rates unchanged when it meets on Thursday, bringing to an end the cutting cycle.

This should stabilise short-term European interest rates (bond yields), which will naturally underpin the Euro, particularly against currencies belonging to central banks that might be inclined to cut interest rates further.

Certainly, the U.S. Dollar is such a candidate, with the Federal Reserve likely to cut by 25 basis points next month, and there is a further 50bp of cuts discounted for the remainder of the year.

The rub is that these developments in interest rates are anticipated by the foreign exchange market, and is therefore in the price of Euro-Dollar.

We see risks that a strong U.S. inflation data print on Thursday prompts markets to reduce already generous bets for Fed easing, which would help the Dollar and weigh on the Euro-Dollar exchange rate.

Markets have meanwhile raised the odds of a more significant 50bp cut in September, in the wake of last week's below-consensus non-farm payroll and JOLTS reports, with the latter revealing that for the first time since 2021, there are now fewer job roles available than there are unemployed.

A strong inflation reading would push back on the expectations for generous Fed cuts, reminding the market that inflation is simply too high to allow for a frivilous monetary policy, and this would help the Dollar.

The market expects inflation to remain well above target at 2.9% year-on-year, with the core measure rising to 3.1%.

Risks to the upside lie with tariff effects starting to become more pronounced in the data, having been relatively muted to this point.

Nevertheless, a softening labour market is helping to dampen second-round effects, which could provide a downside surprise.

An undershoot would increase the odds of Fed easing over the coming months and trigger fresh U.S. Dollar weakness.