EUR/USD Weekly Forecast: US Dollar on a highway to hell after the policy stance changes

The EUR/USD is in a bullish breakout mode since the beginning of 2018 and the bullish trend on the EUR/USD continued also during the fourth week of January, with the EUR/USD rising about 1.4% higher since Friday, January 19.

The drivers of the EUR/USD market were global. The US government shutdown, the verbal nervousness of the US officials in Davos and the official slowdown in the growth of the US GDP.

Similarly to other major currency pairs, also the EUR/USD has been driven higher at the beginning of last week by the US government shutdown. It was eventually reverted as early as Monday evening, but the US Dollar negative sentiment prevailed for the rest of the week.

At the meeting of world's political and economic elite in the Swiss town of Davos, the US Treasury Secretary Mnuchin said that the US welcomes weaker Dollar as it helps the US trade and growth in general. Although the managing director of the International Monetary Fund together with other major central bankers refused Mnuchin´s statement that created a massive FX market move in favor of major currencies against the US Dollar, the announcement itself was considered at the brink of verbal intervention. The ECB President Mario Draghi also clearly pointed this out citing the agreement of the world major central banker preventing them from competitive currency devaluation. The US President Trump tried to reverse the statement saying that the US still wants strong Dollar, but his verbal intervention failed to have a long-lasting effect. The US Dollar kept falling during the fourth week of January to lose some 1.7% against the EUR by the end of last week.

Technical picture

The technical picture for the EUR/USD is neutral with the currency pair at the top of its current bullish breakout, but still an only halfway to the top of the long-term trend upwards. The technical oscillators including the Relative Strength Index and Slow Stochastics are within the Overbought territory, but given the strength of the swing higher, they rather less indicative.

The Relative Strength Index is currently standing at the highest level since September 2013 and the Slow Stochastics is indicating a bearish crossover within the Overbought territory. On the top of it, the Momentum is also swinging lower.

While the top side of the long-term trend for the EUR/USD sees level around $1.2800 and potentially higher supported also by the bullish crossover of the moving averages of 150 and 100-day, the oscillators are deeply rooted in the Overbought territory.

EUR/USD daily chart

The economic fundamentals

Looking at the economic fundamental of the US and the Eurozone economy, both economic areas share a common macro picture. While the growth outlook improves, the inflation is lagging behind. Even with the unemployment rate in both EU and the US at multi-year lows, the aggregate consumer demand is just not enough to generate enough inflation.

Improved growth outlook was also confirmed last week by the International Monetary Fund issuing upgraded outlook for both the Eurozone and the US in its latest version of the World Economic Outlook.

In terms of monetary policy, the picture is of course different. While the Federal Reserve starting its tightening cycle back in 2016 and continued with three rate hikes in 2017, the ECB is still in a cycle of running it asset purchasing program, although at the reduced volume.

With the EUR/USD rising some 4% higher since the beginning of this year, the ECB President Mario Draghi had a perfect chance to talk the Euro down at the press conference following the Governing Council meeting last Thursday.

Draghi opted to highlight the improved growth outlook instead pushing the EUR/USD to a new 3-year high of $1.2538. In terms of the FX rate, Draghi pointed out that the policies of currency intervention used by the US Treasury Secretary just one day before the ECB meeting are clearly breaching the common agreements of refraining from competitive currency devaluation.

The rise of the EUR/USD on a weekly and daily basis failed to be reversed by the US President Donald Trump trying to belittle his Treasury Secretary words and being misinterpreted by markets while he confirmed that strong Dollar is still in the interest of the US.

Solid economic momentum was documented by a strong reading of composite PMI for the Eurozone that rose to the highest level in 139- months.  

Week ahead

While the US fourth-quarter GDP came out on the downside rising only 2.6% on an annualized basis, the Eurozone GDP due next Tuesday, January 30 is set to equal the growth. While the manufacturing activity is slowing down slightly, the services activity rose way above expectations pushing the Eurozone composite PMI to levels consistent with GDP growth of 1% in the first quarter of 2018.

Eurozone economic calendar for January 29-February 2

Next week is set to be dominated by the US calendar events.  It is the Federal Reserve Bank meeting on Wednesday and then the private sector ADP employment report due on Wednesday and government's non-farm report due on Friday, February 2.

With the US Federal Reserve expected to stay pat on rates after December rate hike, both labor market report due next week are set to deliver a solid increase of about 180 K new jobs in the US in January, confirming the positive state of the US economy regardless of unexpectedly strong slowdown in the fourth quarter GDP.

US economic calendar for January 29-February 2 

There are also reports on manufacturing and services activity from the ISM due next week, but compared to Fed and non-farm payroll report they are of the second rank.

The strength of the US labor market and Fed’s firm commitment to interest rate increases is the major argument in favor of the US Dollar correcting from recent low and dragging the EUR/USD lower. 

This is also documented by the FXStreet Forecast Poll of market analysts that see the EUR/USD lower by the end of next week with most of the participants being bearish for next week.

FXStreet Forecast Poll