EUR/USD Weekly Forecast: Can the ECB trigger a U-turn?

• The dollar’s sell-off is far from over, despite its latest corrective advance.
• The main event next week will be the European Central Bank monetary policy announcement.
• EUR/USD is technically bullish in the longer-tun, buyers to return on pullbacks.

The EUR/USD pair soared to a fresh multi-year high of 1.2177 this week, a level that was last seen in April 2018. The dollar was sold-off either with positive or negative headlines, with EUR/USD technical breakout of the previous year’s high at 1.2011 exacerbating the rally. The pair retreated just modestly from such a high, holding on to most of its weekly gains.

Stimulus talks back on the table

Market players had loads to digest this week, starting with a quite encouraging factor. On Tuesday,  a group of US bipartisan lawmakers offered a new $908 billion COVID-19 relief package. Talks between House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell stalled ahead of the presidential election, but negotiations made an explosive comeback, as the new amount triples the previous highest proposal.  

However, parties’ leaders poured some cold water on hopes, as Senate Majority Leader Mitch McConnell rejected the proposal, but brought up a new relief plan of roughly $500 billion. US  Federal Reserve Chair Jerome Powell and Treasury Secretary Steven Mnuchin had urged Congress to approve an aid program, to support the economy through the winter. Stimulus-related news fell short of boosting equities, as Wall Street spent most of the week in the red.

Coronavirus and China

On the coronavirus front, several companies have received emergency authorizations of their preventive vaccines or are in the process of doing so. The encouraging news partially overshadowed the fact that the virus is out of control in the US. The country keeps reporting record daily contagions and deaths and has announced it could start immunization as soon as this month, although a certain date hasn’t been given yet. The UK and Russia announced vaccination will start in the next days. The COVID-19 situation in Europe is only a bit better, although restrictive measures remain in place in multiple countries.

US President Donald Trump revived trade tensions with China, threatening to remove Chinese firms from Wall Street. The House of Representatives passed a bill that would prevent companies that refuse to open their books to US accounting regulators from trading on US markets. Elected-president Joe Biden said that he is not planning to lift tariffs in the near-term,  noting that building an alliance comes first.

Germany in trouble, US data soft

The macroeconomic calendar included some critical hints on economic growth. Markit published the final versions of its November PMIs, showing that manufacturing and services output was downwardly revised for Germany but upwardly revised for the EU and the US. The official US ISM Manufacturing PMI fell to 57.5, while the services index was down to 55.9, both missing the market’s expectations, further hurting the dollar.

The EU and Germany reported October Retail Sales, which were better than anticipated, and the preliminary estimates of their respective November inflation. In Germany, the annualized CPI contracted to -0.3%, while the Union’s inflation was also -0.3% YoY.

At the end of the week, the US published November employment figures. The Nonfarm Payrolls report showed that the country added just 245K new jobs in November, far below the expected 469K. The unemployment rate contracted to 6.7%, better than anticipated.

The second week of December will have little of interest from the macroeconomic side. The main event will be an ECB’s monetary policy meeting on Thursday. President Christine Lagarde has long ago anticipated more easing is coming to support the Union’s economy throughout the pandemic. Market players are pricing in an extension of TLTROs, and an increase in PEPP by up to 500billion euros. The ECB has expressed concerns about EUR/USD at 1.2000, and the current rally may well be a critical issue to discuss on Thursday.

Germany will publish the December ZEW survey on economic sentiment, expected to contract further, while the US will release the December Michigan Consumer Sentiment Index´s preliminary estimate. The EU will release the final reading of Q3 Gross Domestic Product, while the EU and the US will offer the last versions of their November inflation figures.

EUR/USD technical outlook

The long-term picture for EUR/USD is bullish, according to the weekly chart. After bouncing from a bullish 20 SMA last week, the pair accelerated north and ended the week near its recent highs, a sign of persistent buying interest. The Momentum indicator bounced from its midline and heads higher, although with limited strength, while the RSI maintains its bullish slope near overbought levels.

In the daily chart, the pair is clearly overbought, with modest signs of bullish exhaustion. The price is developing above all of its moving averages, which maintain their upward slopes. Technical indicators have been pretty much flat at weekly highs since last Tuesday, when the pair broke higher, drawing a technical divergence yet to be confirmed.  They turned marginally lower as the pair retreated from highs by the end of the week, but remain firmly anchored in overbought levels.

The pair has an immediate support LEVEL at 1.2100, followed by the former year’s high at 1.2011. Below the 1.2000 figure, the pair could enter a more sustainable bearish corrective decline and extend it towards 1.1860. Above 1.2185, the pair could extend its gains up to 1.2300 in the upcoming days.

EUR/USD sentiment poll

The FXStreet Forecast Poll shows that price moved ahead of investors’ considerations these days. The EUR/USD pair is expected to give up from the current levels, as bears lead in the three time-frame under study, although on average is not seen going way below 1.20.

The Overview chart, on the other hand, indicates a strong bullish momentum in the weekly perspective, with the moving average heading firmly north. The monthly moving average advances just modestly, while the quarterly one heads slowly but firmly higher.