Euro / Dollar Week Ahead Forecast

The euro to dollar exchange rate has maintained its recovery from November’s lows below 1.12, which could keep the single currency under wraps as 2021 approaches.

Before the holiday break, Europe’s single currency recovered above the 1.13 handle against the US dollar. Afterward, it had an unusually narrow range when the 1.1356 level. It coincides with the 23.8 percent Fibonacci retracement of September’s decline – proved impossible.

Near-term resistance remains at 1.1325/29, with 1.1356/60 ideally capping the short-term risk. A close above 1.1387, on the other hand, would see a small base complete. This would pave the way for a more profound recovery to 1.1433/40. Potentially it could be what we would expect to be much stricter resistance at 1.1457/64.

Eurozone

Price action is not showing much directional bias in the short run. Still, the chart outlook is negative due to the EUR’s repeated failures to advance beyond the mid/upper 1.13s over the last month.

No central bank policy events or prominent economic figures are scheduled for the coming week. This left holiday market conditions with typically lower trading volumes.

USD could benefit from negative Omicron news, though its positioning remains stretched and prone to further reduction into year-end. The divergence between the European Central Bank (ECB) and the Fed was a significant contributor to the euro-7.14 dollar’s percent 2021 decline. Hence, market appetite for the greenback and changes in expectations for the Federal Reserve interest rate policy will be necessary again in January.

The European Central Bank (ECB) announced this month that it will end its €1.85 trillion Pandemic Emergency Purchase Programme in March. Hence, it will gradually return to its pre-pandemic pace of purchases under its original Asset Purchase Programme 2022.

It will result in a significant reduction in Frankfurt’s footprint in the Eurozone government bond market. However, the Fed expected to go even further. The euro-dollar has lacked directional bias since both banks’ December policy decisions.