EURUSD technical increasingly constructiveEurozone PMIs could offer a boost TuesdayThursday's ECB decision to offer volatilityWatch U.S. GDP Thurs. and PCE index Fri.

Image © Adobe Stock

The Euro to Dollar exchange rate will attempt to break out of a technical downtrend this week, but Eurozone flash PMI data, an ECB meeting and a U.S. GDP release will have a final say on the matter.

These calendar events will test the Euro's resilience that characterised last week's performance, particularly given the number of factors that were lined up in favour of the Dollar.

The Dollar was unable to rally despite heightened nerves over the potential spread of unrest in the Middle East and a surge to fresh multi-year highs in U.S. ten-year bond yields as investors acknowledged interest rates are set to stay at elevated levels for a protracted period.

Euro-Dollar defended the 1.05 level to record its largest weekly advance since early July, in the process presenting traders with an improved technical setup that could yield further gains over the coming days.

"EURUSD is putting the broader downtrend off the July high under a little more pressure," says Shaun Osborne, Chief FX Strategist at Scotiabank. "Shorter-term trend signals indicate there is some positive momentum developing around the EUR's push higher."

The Scotiabank analyst looks for rallies to potentially fade near solid resistance at 1.0610 and 1.0640, while chances of a modest extension towards 1.0650/1.0750 "at least" are seen to be rising.

"The currency pair was trying to break its well-established bearish trend line and a key short-term resistance area around 1.0580," says Fawad Razaqzada, an analyst at City Index.

Image courtesy of City Index. Set up a daily rate alert email to track your exchange rate OR set an alert for when your ideal exchange rate is triggered ➡ find out more.

"A successful break above this level could pave the way for a further upward movement towards a more substantial resistance level at 1.0635, above which one will have to consider the possibility that rates may have formed a bottom," says Razaqzada.

He adds that key support comes in around the 1.05 handle, but there are several other shorter-term levels to watch before that, including 1.0530.

The Euro's ability to break above the bearish trend line will likely be determined by the flavour of incoming data in what is a busy week for the Eurozone.

First up is the release of flash PMI survey figures on Tuesday at 09:00 BST, where the market expects a composite figure of 47.4, with manufacturing expected at 43.7 and services at 48.6.

"Unless we see a surprise improvement in the PMI readings for the Eurozone, expect the pressure to remain on the EUR/USD," says Razaqzada.

Sentiment towards the Eurozone has been resolutely negative since July and we would expect greater scope for upside in the event of the figures beating expectations than vice versa.

The European Central Bank (ECB) is due to deliver its latest policy decision on Thursday at 13:15 and the market is poised for Frankfurt to call a pause to its hiking cycle in view of both softening economic activity and inflation.

This would not be a surprise to the market and won't impact Euro exchange rates; instead, it falls to the guidance issued by ECB President Christine Lagarde and the Governing Council to move the market.

File image of ECB President Christine Lagarde. Photo by Sanziana Perju / European Central Bank.

The general rule of thumb is that 'hawkish' guidance would prove supportive of the Euro, and this would most likely come in the form of a clear message that a further hike might still be required to get a firm grip on inflation.

Here, commentary on the economy would also be optimistic, emphasising the likelihood of a 'soft landing' scenario whereby inflation is brought down with a minimal hit to growth, prompting investors to push back the expected timing of the first rate cut in 2024.

A 'dovish' guidance would likely result in Euro weakness, this would potentially involve a clearer signal that the Bank is confident enough has been done in order to bring inflation down. It would likely involve the ECB placing great emphasis on the slowdown in the Eurozone economy, allowing investors to raise bets for a rate cut.

The Dollar: PCE and GDP

Image © Adobe Stock

The Dollar's calendar in the coming week is dominated by a GDP print and the release of inflation numbers in the form of the PCE index, but global investor sentiment and the evolution of U.S. longer-term bond yields will also continue to be of importance.

The release of quarterly GDP comes at 13:30 BST on Thursday and therefore clashes with the ECB's event, which could make trade around this time interesting, albeit somewhat confusing.

The market is watching for 4.1% quarter-on-quarter growth to be reported for the third quarter as activity picks up from the second quarter's 2.1%, confirming activity has picked up over recent months.

"If GDP and most other US macro pointers in the week come in higher, then at the very least it would boost the “higher for longer” narrative, while data disappointment could finally send US dollar and yields lower," says Fawad Razaqzada, an analyst at City Index.

A strong beat could offer some support to the Dollar, although it must be said a great deal of good news is already priced into this currency (which contrasts to the large amount of bad news priced into the Euro, which further tilts the risks in favour of a Euro-Dollar rebound).

Other U.S. events to watch are the release of durable goods orders, to be released alongside the GDP print, where an increase of 0.6% is anticipated.

There is some inflation data on tap Friday, with the release of the PCE price index at 13:30 BST. This is a notable release in that it is actually considered to be the Federal Reserve's favourite measure of inflation.

The market reaction could therefore be worth watching if the actual numbers deviate from the expectation. In this regard, the consensus sees the headline PCE index rising 0.3% month-on-month in September, with the core PCE rising by a similar margin.

Should the numbers undershoot, the Dollar could weaken, but it would likely take a sizeable overshoot to prompt a Dollar rally, given the asymmetric expectations pertaining to U.S. data (i.e. a lot of good news is baked into the USD).