Euro to Dollar Exchange Rate Forecast: A Shift from Neutral to Bearish

euro to dollar exchange rate 2

The market in EUR/USD has taken a notable shift of late with the euro bulls appearing unable to resist the newfound positivity towards the US dollar.

  1. EUR/USD seen at 1.1310 at start of new week
  2. Only a move below the 1.1250’s would provide confirmation of an extension down to the 1.1216 lows
  3. Shift in trend called by UOB on unexpected decline

The dollar's May recovery appears to still be intact - indeed, we wrote at the start of the month that May is historically one in which the USD rallies.

The move lower in the EUR to USD exchange rate accelerated on the final day of the previous week after the release of eurozone first quarter economic data showed a downward revision in growth from 0.6% to 0.5%.

Though still above estimates of 0.3%, the revision led to a sharp fall in the pair, which broke below the trend-line for the move up from the March 10 lows.

Such a trend break is often seen as an open invitation to further losses.

During the US session the pair extended its break after US Retail Sales came out better-than-expected, further supporting the dollar.

Retail Sales in April showed a rise of 1.3% compared to -0.3% drop in March; the results proved fears of a contraction after earnings results from major retailers published on Thursday proved lacklustre, were baseless.

The strong US data bolstered the outlook for US growth in Q2, which analysts had feared might be subdued following the weak growth in Q1. A weak Q2 would weigh on the dollar as it would be likely to substantially delay the Fed’s intention to raise interest rates.

Shifting the Outlook

Analyst Quek Ser Leang at United Overseas Bank says his team is shifting from neutral to bearish on the 1 to 3 month timeframe:

"The unexpected breach of 1.1350 and 1.1300 last Friday has shifted the risk to the downside. While the outlook for EUR is bearish from here, the downside potential  appears to be limited to a test of April’s low of 1.1210/15."

Technical Analyst Karen Jones of Commerzbank has expected weakness ever since the pair was rejected by the top of the channel of a two-month up-trend, when it recently peaked at 1.1670.

Now, “below the uptrend we look for further weakness to initially the 1.1216 April trough.”

EURUSDMay13bc

We do not see a move down to the lower 1.12s as a foregone conclusion, since the 50-day moving average lies in the way at Friday’s 1.1290 lows.

This will be difficult to penetrate and only a move below the 1.1250’s would provide confirmation of an extension down to the 1.1216 lows earmarked by Commerzbank.

This does not, however, leave much scope for profit.

FX Themes

The dollar has strong fundamentals supporting it, particularly now after the release of April Retail Sales, which helped improve the outlook for Q2 growth.

The currency has been further supported by commentary from Federal Reserve officials. Even an outright dove like Rosengren, who has normally been very cautious about suggesting the central bank should increase interest rates, was quite upbeat about the US economy,  saying that markets were underestimating it and the possibility of a rate hike: 

“We would view the comments from avowed dove Rosengren as particularly noteworthy. Hence amidst our assumption of a rapid rebound in Q2 activity the Boston Fed President reminded the market that it ‘remains too pessimistic about the fundamental strength of the U.S. economy, and the likelihood of removing monetary accommodation is higher than is currently priced into financial markets based on current data.” Commented CIBC Capital Markets’s Jeremy Stretch in a note.

A rate hike in June now appears highly unlikely, thought expectations of a September cut have increased. Market-based indicators are currently showing only a 11.5% probability of two rate cuts in 2016 altogether, according to Intesa San Paolo’s May 12 Market Monitor.

The euro, meanwhile, continues to benefit from a gradually improving economic outlook for the region and firm expectations the European Central Bank (ECB)will not embark on any further stimulus in the near-term. There are even hints of a collusion between the Fed, the BOJ and the ECB to put easing on hold so that the dollar remains at a competitive level (ie undervalued).

The region’s burgeoning current account surplus supports the euro as it is indicative of a positive net demand for euro-denominated exports.

Nevertheless this makes it particularly sensitive to risk appetite, as when the outlook is positive it increases outflows of euros from the region, weakening the euro, whilst the opposite tends to happen when risk aversion has the upper hand.

Data hotspots in the Week Ahead

The main releases for the US includes Building Permits in April, which is out on Wednesday May 18 and is expected to show a rise to 1.13m.

April CPI is forecast to rise a basis point to 0.2%, also on Wednesday. The end result will clearly be important for the dollar, as a higher-than-expected rise in inflation will increase pressure on the Federal Reserve to increase interest rates.

On Thursday the Philadelphia Fed Manufacturing Index is expected to show a rise to 3.5 from -1.5 previously.  Existing Home Sales are due for release on Friday, and forecasted to rise to 5.4m in April. 

The main release for the euro is the second estimate for April CPI on Wednesday. The preliminary estimate was -0.2% and if it is revised down that would have a very negative impact on the euro. The eurozone economy has been recovering gradually but its Achilles’ heel remains inflation.

The ECB themselves, amongst others, have said they expect inflation to bounce back during Q2, and end the quarter at 0.2% according estimates from Trading Economics.

euro area inflation cpi