EUR/USD Forecast: Dollar in trouble ahead of Fed's meeting

EUR/USD Forecast: Dollar in trouble ahead of Fed's meeting

29 April 2017, 09:44
Valeriy Brusilovskyy

What a way for the EUR/USD pair to close April! The common currency surged to fresh 2017, gapping around 200 pips on Sunday, amid the result of the first round of the French presidential election. Centrist Emmanuel Macron and  populist candidate Marine Le Pen advanced to the second round of the French presidential election, with the first leading with 23.7 and Le Pen pulling in 21.7%. The two of them will now confront  on the second round, next May 7, and polls show that Mr. Macron has solid chances of winning.  The common currency rallied on relief as Le Pen is seen by investors as a synonym of "Frexit."

EUR's demand survived a not so optimistic ECB, which left its monetary policy unchanged last Thursday, indicating that economic growth is doing fine but inflation not that much and therefore that tapering QE is not yet an option. However, EU inflation released early Friday came in much better than expected, up to its highest in over three years and close to ECB's target. April preliminary CPI came in at 1.9% from 1.5% in March, whilst core inflation, which excludes food and energy volatile prices, rose by 1.2% yearly basis, up from previous 0.8%, the highest level since September 2013. Such figures put easing back on the table.

In the US things were not that bright, as data released all through the week missed expectations. On Friday, the preliminary Q1 GDP came in at 0.7%, below market's forecast, but in line with the negative figures seen lately, while the Michigan Consumer sentiment index for April retreated to 97 from previous 98. Overall, there's a general sense that Trump-promised boost to growth is not coming as fast as expected, although markets are not yet ready to give up on hopes.

Next week, FED's monetary policy meeting and US Nonfarm Payrolls will take center stage, with a holiday in Europe on Monday and the Golden Week in Japan anticipating some choppy trading ahead of the events. The FED is not actually expected to make a move, but investors will be looking for clues on what will happen in June and whether a rate hike is possible then. Payrolls will probably lose relevance being released a couple of days after the FED's meeting, although the US really needs a strong reading in there to regain some confidence.

From a technical point of view, the EUR/USD rally stalled at a major resistance this week, as the 1.0930 region stands for the 61.8% retracement of the post US-election slump. Given however that the pair settled a few pips below it, and that the intraweek decline met buying interest around 1.0820, the 50% retracement of the same decline, the risk is clearly towards the upside. In the weekly chart, technical indicators lack directional strength, while a major resistance can be seen at 1.1100, the 100 SMA. Daily basis, the Momentum indicator lost upward steam within positive territory, pretty much because the pair has been consolidating all through the week, but the price is above all of its moving averages, whilst the RSI indicator consolidates near overbought readings, also favoring additional gains for next week.

Above 1.0950, the next short-term resistance comes at 1.1000, followed by 1.1045, although gains up to 1.1260 could be possible if the pair advances further beyond this last. The bullish trend will persist as long as the price holds above the mentioned Fibonacci support at 1.0820, although a break below the level should favor a downward move towards the 1.0730 level, where the pair will fill this week's opening gap.

Sentiment towards the American currency is clearly negative in the short term according to the FXStreet Forecast Poll, as most majors are seen gaining against the greenback next week, with the only exception of the Canadian dollar, seen sideways.

In the case of the EUR/USD pair, bullish led by little, representing a 38%, while those betting on further consolidation reach 37%. In the 1 and 3 months' perspectives, however, market favors the greenback, with 80% of the polled experts favoring the greenback to an average target of 1.0592. The poll converges with the overall sentiment towards Trump and his growth policies, seen delayed but not down yet. On a color note, the pair is hardly seen recovering beyond 1.1000 in the next three months.

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