Image © European Central Bank

- EUR/USD continues steady decline

- Breakdown last week suggests vulnerability

- Euro to be moved by inflation and retail sales

- U.S. Dollar by ISM and Payrolls

The Euro-to-Dollar exchange rate is trading at around 1.0940 at the start of the new week, after falling 0.70% in the week before. Studies of the charts are showing the short-term trend is vulnerable to continuing lower.

The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows how the pair broke temporarily below its range lows at 1.0925 last week.

Although it recovered back inside the range the temporary break reveals a bearish vulnerability and a move back below the 1.0905 lows would confirm more downside to a potential target at 1.0850.

If the pair fails to break lower, however, it will probably continue trading within its existing range stretching from roughly 1.0900 to 1.1050.

The daily chart shows the longer-term downtrend and how recent weakness could persist further, to the next downside target at 1.0800.

The pair’s longer-term downtrend also supports this bearish outlook.

The RSI momentum indicator, however, does not.

Momentum remains quite buoyant suggesting bears should act with caution.

The RSI failed to make a new low when the exchange rate did last week setting up a bullish convergence which suggests a risk of a rebound.

The daily chart is used to give us an indication of the outlook for the medium-term, defined as the next week to a month ahead.

The weekly chart shows the pair continuing to fall within the confines of a possible wedge pattern. (The weekly chart is used to give us an idea of the longer-term outlook, which includes the next few months.)

If it breaks lower it could also fall to a potential downside target at circa 1.0700.

Likewise a breakout higher would probably encounter resistance at the level of the 50-week MA at 1.1275.

As the wedge tapers there will be more chance of a volatile breakout - either higher or lower.

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The Euro this Week: Inflation Data

The main data releases for the Euro in the week ahead are September inflation data on Tuesday and retail sales on Thursday.

Inflation dictates central bank interest rates which are highly correlated to currency strength, so Eurozone CPI data on Tuesday at 10.00 BST has the potential to move markets.

It is expected to remain unchanged at 1.0% in September, with core inflation - which cuts out volatile food and fuel components and is thus a better gauge of demand - expected to rise to 1.0% from 0.9%.

If inflation rises more than expected it will support the Euro but if it declines more than expected it will weaken the currency.

Lower interest rates are negative for a currency because they make it less attractive to foreign investors looking for somewhere to park their capital.

The other main release for the single currency in the week ahead is retail sales which is forecast to show a 0.3% rise from -0.6% previously when it is released on Thursday at 10.00 BST.

A higher than expected reading should be taken as positive for the Euro, while a lower than expected reading should be taken as negative for the Euro.

The U.S. Dollar: What to Watch this Week

The main releases for the U.S. Dollar in the coming week are the ISM Manufacturing survey on Tuesday, the ISM Non-Manufacturing PMI on Wednesday, and Non-Farm Payrolls out on Friday.

The ISM Manufacturing PMI is an important gauge of the U.S. economy which often impacts on the Dollar.

The result may be especially pertinent this time around given the current debate about whether the U.S. economy is in danger of entering a recession or not.

It is a survey-based indicator generated using responses from purchasing managers within sector-specific companies, who are viewed as pivotal in assessing the outlook. Along with the ISM non-manufacturing is viewed as a reliable leading indicator for the broader economy.

ISM Manufacturing in September is forecast to show a rise to 50.1 from 49.1 previously when data is released at 15.00 on Tuesday.

A result above 50 would be significant as it is the differentiator between growth and contraction.

The ISM fell below 50 for the first time in over 2 years in August, and a rise back above would be a major positive sign for the economy, and for the U.S. currency.

The ISM Non-Manufacturing gauge is forecast to show a fall to 55.0 from 56.4 when it is released on Thursday at 15.00.

It is significant for the same reasons as the ISM Manufacturing PMI.

The final key release for the U.S. Dollar is Non-Farm Payrolls for September, which is forecast to show a 145k rise in the number of new jobs created by the U.S. economy when released at 13.30 on Friday.

Average hourly earnings, released at the same time, are forecast to show a 3.2% rise on a yearly and 0.3% rise on a monthly basis at the same time.

Employment and pay are highly correlated to economic growth and the U.S. Dollar, so a better-than-expected result would probably push up the Dollar; whilst vice versa for the worse-than-expected result.

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