EUR/USD weekly outlook: Will the dollar extend its post FOMC gains?

This weekly EUR/USD outlook article was written before the FX markets closed on Friday. At the time of writing, the pair was holding flat on the day, having risen noticeably off its earlier lows when it hit 1.1418. The US dollar remained largely supported, though, as it continued to hold on to gains generated by the Fed’s unexpectedly hawkish message in mid-week. The EUR/USD found some mild support on profit-taking on Friday when US investors were out. I can’t see the pair falling too much lower from here, and think it is best positioned for a recovery among the majors once the dollar-buying runs its course.

 

EUR/USD outlook: What to watch next week

 

The key question is whether the dollar will remain on the front-foot or give back some gains as investors weigh a hawkish Fed (good for dollar) against falling oil prices (bad for dollar). Some attention will now shift towards comments from Fed officials. With formal forward guidance largely absent, individual speeches may carry greater influence over rate expectations. That raises the likelihood of more pronounced swings across both bond and currency markets as investors react to each new economic release.

 

From a data point of view, global PMIs on Tuesday and the Fed’s favourite inflation measure on Thursday will be among the most important macro pointers to watch.

 

• Global PMIs (Tuesday): Last week saw European markets outperform, supported by softer energy prices, not-so-bad economic data, and growing confidence that the ECB may not have to hike rates any further - thanks to the collapse in oil prices. Will European PMIs reflect investor optimism?

• US core PCE (Thursday): After the much hawkish than expected policy decision from the Fed last week, incoming data will be watching closely after the new chairman Warsh said that financial markets work best if they react to the data and not to the Fed. This is the Fed’s favourite inflation measure so it will carry extra importance.

 

Will US dollar maintain gains?

 

While the recent move has been impressive, I remain sceptical whether this is the beginning of a sustained dollar bull market. The easing of geopolitical tensions following the US-Iran agreement removes one of the more supportive arguments for the greenback. At the same time, investors are assigning too high a probability to further Fed tightening. Nevertheless, short-term momentum remains favourable for the dollar. Markets appear increasingly willing to embrace the prospect of two additional rate increases by year-end, particularly if incoming US economic data remain resilient. Current pricing still leaves room for hawkish repricing should key indicators surprise to the upside.

 

EUR/USD outlook: Will the pair break March lows?

 

For the euro, although recent declines in crude oil may have suggested the single currency may have ended up higher than lower, it has been the opposite against the US dollar. But looking at euro crosses, we can see strength coming through, not least versus the franc and pound. Still, the long-term EUR/USD outlook is not completely bearish, although the lower highs on the pair suggest that the near-term path of least resistance remains to the downside heading into the new week. Key resistance is now seen between 1.1478 to 1.1500 area, formerly resistance. Above that 1.1576-1.1600 is the next key battleground. The lows from August 2015 (1.1391) and March 2026 (1.1411) come in around the 1.1400 handle. Should we see a decisive break beneath that zone, this could pave the way for a potential drop to 1.1300.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R