EUR/USD Weekly Forecast March 27-31
Frankfurt (Mar 26) A slowing of volatility was apparent in most major currencies in the past week. EUR/USD posted a notable single-day advance in the early week but consolidated below resistance for the remainder on a light economic calendar.
Developments since the second half of the month indicate a strong shift of sentiment in EUR/USD. Nevertheless, the pair faces strong overhead resistance while the US dollar index (DXY) trades in a critical area. A catalyst may be required for a bullish continuation in the exchange rate and in its absence, there may be a consolidation of gains in the upcoming week.
After a notable shift in euro positioning in last week’s COT report, there was an even further drop in net short positioning among non-commercials. The report shows a 50% drop in net euro positioning which follows a 30% fall in the prior week. For the week to March 24th, there was a draw of $2.8 billion, bringing the net short to $2.7 billion. This marks the smallest net short euro position in over a year. The positioning shift was not a broader flight from the dollar as the aggregate US dollar net long was reported at $19.4 billion, following a weekly build of $1.3 billion.
The US dollar index dropped below an important horizontal level in the past week that had previously held price action lower 2015. The continued pressure since the Fed meeting has put a spotlight on a head and shoulders pattern that has been forming since the middle of November. Measured move targets for the pattern fall around 95.00 if the neckline, at around 99.43 is broken. While recent developments have shifted odds towards a break lower in the index, a catalyst will likely be required because of the sizeable move implied by a neckline break.
There are several economic releases pertaining to EUR/USD in the upcoming week. There is some potential that some of the data could shift monetary policy expectations over the medium-term but a notable deviation would be required for this to materialize.
Inflation data will be released from both Europe and the United States. The PCE index is the preferred measure of inflation for the Fed and will be important. Recent comments from Fed Kashkari, who dissented at the March meeting, suggested that inflation gains have been driven by base effects in oil and that upward pressure has been much more moderate in inflation data excluding the more volatile items. This emphasizes the core inflation figure in the upcoming week. A softer number could drastically alter expectations for near-term tightening in the United States while a stronger figure would add to the case of another rate increase in June.
Eurozone inflation will be similar in that the core figure will be closely watched. A stronger figure will tend to carry more risk for EUR/USD as it will make it difficult for Draghi to continue trying to dismiss inflation gains. As Friday’s release is the first reading of CPI it stands to cause a volatile reaction.
Quarterly US GDP figures will be released on Thursday, as its a final reading it will tend to have less of an impact on the exchange rate. US consumer confidence figures will be released on Tuesday and also stands to trigger volatility.
EUR/USD broke above a trendline from December highs in the past week but faces a trendline that has impacted price action for a much longer period. The trendline connects the 2016 high, which was posted in May, with highs posted in August. A horizontal level at 1.0821 falls within close proximity to add confluence. The level has been well respected in the consolidation from early 2015 and more recently, triggered a turn lower in February. Adding further confluence is the 50% retracement measured from the spike high printed during the US elections to the low in early January.
With several important resistance levels in EUR/USD, a sustained upside break is likely to lead to a breakdown of the head and shoulders pattern in the US dollar index.
While below the confluence of resistance, support is seen at 1.0710 as it has been well respected since early 2015. Ahead of the level, support from a rising channel will be closely watched. The rising channel has held price action since the second week of March. A break below the channel bottom would provide technical confirmation that the pair is correcting against recent gains.
Source: EconomicCalendar
