The Dollar has weakened of late although this could change if tax reforms are enacted any time soon. The Euro will take its cue in the week ahead from politics and economic data.
The Euro-to-Dollar pair appears to have stalled mid-trend and has begun to trade sideways, within a range between 1.1550 and 1.2100.
Above: Euro-to-Dollar rate shown over a six-month time horizon.
The charts still suggest the pair will eventually breakout higher once the consolidation ends, however, in the very short-term the exchange rate may remain under pressure.
The 4-hour chart is showing the sequence of peaks and troughs descending toward the base of the current range and a break below the December 12 lows, at 1.1718, would probably lead to another extension lower to the 1.1660 level.
Above: Euro-to-Dollar rate shown at 4-Hour intervals.
The monthly chart (below) shows the strong uptrend in force prior to the consolidation, which saw EUR/USD rise from lows of 1.03 in February, to a peak of 1.21 in early September.
Since then the exchange rate has fallen back to the 1.17 area but we don't think the 'look and feel' of the chart suggests a complete capitulation or a consequent reversal back toward the lows seen earlier this year.
Above: Euro-to-Dollar rate shown at monthly intervals.
We expect the uptrend to eventually resume, which would be confirmed by a move above the earlier 1.2100 ceiling, to a target of 1.2210. This is just beneath the R2 monthly pivot.
R2 is likely to prove a formidable glass ceiling, above which it could be difficult for the exchange rate to break. Technical traders often expect a pull-back when prices reach their monthly pivot points and sometimes trade accordingly by placing short-term bearish bets on the exchange rate.
Data and Events for the Euro
Given how important political factors have become for currencies of late, the Catalan regional elections on Thursday, December 21 will be a major event for the Euro.
The pro-unity Spain Ciudadanos party is expected to get the largest share of the votes, at around 25% if opinion polls are to be believed. Such an outcome could help the Euro 'pop' higher as it will reduce the political risk premium attached to the currency, albeit marginally.
In terms of economic data, wage growth numbers are due out at 10.00 GMT Tuesday, December 19, and could have an impact on the Euro because of their influence on inflation expectations and, therefore, interest rates.
Wages are forecast to have grown by 2.1% in the third-quarter from 2.0% in the previous period. A greater than expected rise would be supportive of the Euro.
Eurozone current account data, due Wednesday at 09:00 am, is forecast to show the currency bloc’s surplus falling to €33bn, from €42bn.
A greater-than-expected fall would weigh on the Euro as the current account reflects the difference between money flowing into and out of Europe so is, therefore, an indication of demand for the Euro.
Data and Events for the Dollar
The Dollar is likely to trade according to the "whim of year-end flows and tax reform headlines" in the week ahead according to Kathy Lien, a managing director of foreign exchange strategy at BK Asset Management, since the economic data in the calendar is not seen as particularly biting.
Nevertheless, given concerns about inflation staying lower for longer and the implication of this for interest rates (which are important for currencies) personal consumption expenditure (PCE) data out Friday at 13.30 GMT will be watched closely. It is the Federal Reserve’s favoured inflation gauge.
Core-PCE is expected to have risen by 1.5% in November, when compared with the same period one year ago, which is up from the 1.4% growth seen in October.
The Core-PCE removes volatile food and energy items from the basket of goods whose prices are measured and so it is seen as a better measure of “underlying inflation pressures” for the US economy.
Personal Income and spending figures, which are important for inflation expectations, are also due out at 13:30 on Friday. Larger than expected gains, or surprise falls, in these numbers will have some an impact on the Dollar.
The Philly Fed manufacturing index, due out at 13.30 on Thursday, and Michigan sentiment measure on Friday are the final Dollar reports of note for the week.
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