The EUR/USD exchange rate is trending back towards the middle of its long-term range and charts are suggesting further downside to 1.1201
The euro to dollar exchange rate (EUR/USD) has risen at the start of the new week and is seen trading at 1.1308.
The gains come as stock markets fall into the red following news of a failure by major oil producers to agree on limiting oil production at a conference held in Doha over the weekend. Commodity prices have fallen in sympathy with oil, and for a stock exchange such as London which is heavily exposed to commodity extractors, this spells negativity.
The euro meanwhile gains in such environments owing to its status as a funding currency. When markets rise investors use borrowed euros to fund global stock market bets (which involves the selling of euros) and when market sell that money is returned (which involves the buying of euros).
It is still however too soon to decide to say the technical picture for the EUR to USD outlook has improved.
The pair has broken down from its previous place at the top of a long-term range which has unfolded since March 2015, where it was trading in the 1.14s, to a new location in the 1.12s.
Several commentators, including those at Swissquote and Helaba, have noted how the pair appears to have broken out of a smaller ascending wedge.
This alone suggests further downside as the pair falls to the target generated by the wedge breakout at 1.1175, which is equal to 61.8% of the height of the pattern at its widest point:
The monthly pivot at 1.1200, however, is likely to prove a tough obstacle preventing the down-trend from reaching that target, since traders tend to set buy orders on pivots to trade the bounce.
As such we raise our target to a point above the pivot at 1.1201, to lower the risk of failure.
Even if there is a break below the monthly pivot, the 50-day moving average is situated only 20 points lower at 1.1180, which is also expected to stall the down-trend, again due to traders amassing buy orders on it, in the hope of profiting from a bounce there.
A break below the 1.1233 lows would provide confirmation necessary for another leg down to 1.1201.
What Matters for the Euro Dollar in the Week Ahead?
The outcome of the meeting of major energy producers in Doha at the weekend is likely to be a major influence on the pair at the start of the week ahead.
It they agree a supply freeze as is expected, then the price of oil will rise, and this will be seen as broadly positive for the global economy because it will help emerging market producers.
It should spur a rise in risk appetite which will help the dollar (fall in EUR/USD) as it will increase the chances the Federal Reserve (Fed) will raise interest rates sooner than currently anticipated - because the Fed have said they are delaying due to global growth fears.
A failure at Doha will probably have the opposite effect and lead to a fall in investor sentiment, which will help the euro more than the dollar, thus leading to a rise in EUR/USD.
The euro is used as a funding currency due to its super-low interest rates, which makes it cheap to borrow.
International investors borrow in the euro to fund investments in riskier emerging market assets. When risk sentiment turns sour they sell these assets and buy back the borrowed euros, leading to increase in demand for the currency.
All Eyes on the ECB Meeting
The European Central Bank (ECB) meeting on Thursday April 21 is another major landmark for the week ahead in the FX markets.
Like most analysts, Lloyds Commercial Banking expect the ECB to keep policy unchanged at the April meeting as the economic picture in the Eurozone appears to be holding firm.
In a recent research note they are cautiously upbeat about the prospects for the Eurozone economy in Q1:
“Latest indicators, including industrial production and retail sales, suggest that eurozone economic activity has held up in Q1 and the rate of growth may exceed the modest outturns of 0.3%q/q in the second half of 2015.”
They expect Inflation to remain the same:
“Looking ahead, we expect annual headline inflation to remain around zero percent in Q2, before moving gradually higher in the second half of the year.”
Inflation data remains a key concern for the ECB who are desperate to see prices rise back towards their 2% target rate.
If prices come under pressure going forward then the Bank may resort to more agressive, EUR-negative, policy measures.
Helaba Downbeat about US Economic Outlook
What of the US side of the equation?
US economic performance will be a worry for US Federal Reserve policy makers who will be watching the slowing down in growth.
In fact, the Atalanta Fed's gauge of economic activity shows growth teetering above 0% with the last two readings in the GDPNow estimate showing 0.1% and 0.3% growth. The trend here is lower.
“The first quarter in the USA is likely to have been characterised by only meagre GDP growth. Admittedly, the sentiment indicators for industry and the service sector, which recovered in March, do not point in this direction, but the monthly factory orders, retail sales and foreign trade figures do,” says Helaba Research’s Ralf Umlauf.
The suggestion there may be some divergence in Eurozone and US economic growth may provide underlying support to the EUR to USD exchange rate going forward.
Data Hotspots in the Week Ahead
Tuesday April 19 sees the release of US Building Permits and Housing Starts data for March, which should enable investors to take the pulse of the housing market, however, given the mixed signals recently this is unlikely to cause much volatility unless it comes out way out of line with expectations.
Philadelphia Fed Manufacturing on Thursday April 20 is forecast to come out at 7.0 from 12.4 previously.
Manufacturing PMI for April rounds off the week on Friday. The gauge came out at 51.5 in the previous month.
Eurozone Manufacturing PMI is also published on Friday, with a rise to 51.8 expected in preliminary estimates for April.
Euro-zone Services PMI is likewise forecast to rise two basis points to 53.3 from 53.1 in April.
The release of both US and EU PMI’s on the same day could cause some short-term volatility for the EURUSD if there is a ide difference in the outcome of the two sets of data.