EUR/USD Forecast: 11-Week Losing Streak; A Services Sector Spark Ahead?

Highlights

• EUR/USD ended the week down 0.67%, falling for the eleventh consecutive week.
• Eurozone private sector PMIs to dictate recession expectations, with the spotlight on Germany.
• US labor market and ISM Non-Manufacturing PMI to define USD strength.

Weekly Overview of Week Ending September 29, 2023

In the week ending September 29, the EUR/USD fell by 0.67%, closing the week at $1.05739. The EUR/USD reached a Monday high of $1.06556 before sliding to a Wednesday low of $1.04881. A 0.60% gain on Thursday limited the losses for the week. However, the EUR/USD extended its weekly losing streak to eleven consecutive weeks.

Private Sector PMIs and the German Economy in the Spotlight

Manufacturing PMI numbers for the euro area will kickstart the week. The manufacturing PMI for Italy and finalized PMIs for France, Germany, and the Eurozone will draw investor interest.

The manufacturing sector contributes less than 30% to the Eurozone GDP. However, improving manufacturing sector conditions could ease fears of a prolonged Eurozone recession.

On Wednesday, the services sector PMIs will likely impact the EUR/USD more. An upward revision to the Eurozone services PMI would fuel buyer appetite for the EUR. The services sector contributes more than 65% to the Eurozone economy. According to the flash survey, the Eurozone services PMI increased from 47.9 to 48.4 in September.

Investors should consider the sub-components of the PMI, with prices, employment, and new orders being focal points.

The investor focus will turn to the German economy on Thursday. Trade data on Thursday and factory orders on Friday will indicate whether the German economy is turning a corner. An upward revision to the services PMI on Wednesday and encouraging numbers on Thursday and Friday will likely give the EUR/USD a much-needed boost.

Beyond the numbers, ECB commentary also needs consideration. ECB Chief Economist Philip Lane (Tues/Thurs) and ECB President Christine Lagarde (Wed) are on the calendar to speak. Comments relating to the economic outlook, inflation, and monetary policy will influence investor sentiment.

US Labor Market and Services Sector in the Spotlight

On Monday, the ISM Manufacturing PMI will draw investor interest. Upbeat numbers will ease immediate fears of a hard landing. The manufacturing sector contributes 20% to the US GDP. However, investors will remain sensitive to economic activity across the private sector.

The labor market will come into focus from Tuesday. JOLTs Job Openings (Tues), ADP Nonfarm Employment Change (Wed), and Initial Jobless Claims (Thurs) will need consideration ahead of the all-important Jobs Report (Fri).

Weaker-than-expected labor market conditions would raise concerns over the consumption outlook. US private consumption expenditures contribute more than 65% to the US economy. A weakening consumption outlook could reignite fears of a US hard landing.

However, the US ISM Non-Manufacturing PMI will influence investor sentiment toward the US economy. The services sector accounts for over 75% of the US economy. An unexpected contraction across the services sector would spook investors and ease pressure on the Fed to maintain a hawkish rate path.

Economists forecast the ISM Non-Manufacturing PMI to fall from 54.5 to 54.0. However, economists predict average hourly earnings to increase 4.3% year-over-year in September vs. 4.3% in August.

Resilient wage growth would fuel consumption and demand-driven inflationary pressures. Elevated wage growth may force the Fed to keep interest rates higher for longer at the expense of the economy.

Beyond the numbers, investors should monitor FOMC member speeches. Fed Chair Powell is on the calendar to speak on Monday. Reports of the US government averting a shutdown will also impact the appetite for the dollar.

Short-Term Forecast:

The near-term EUR/USD trend will hinge on the US labor market and service sector numbers. Weaker labor market conditions and a contraction across the US services sector would ease bets on a hawkish Fed rate path, narrowing monetary policy divergence in favor of the EUR.

EUR/USD Price Action

Daily Chart

The EUR/USD remained below the 50-day and 200-day EMAs, reaffirming bearish price signals. A break above the $1.06342 resistance level would support a EUR/USD move toward the $1.07635 resistance level.

Upward revisions to Eurozone private sector PMIs and improving numbers from Germany would drive buyer appetite for the EUR.

However, better-than-expected US labor market and service sector data will likely pressure the EUR/USD.

A fall through the $1.05230 support level would give the bears a run at $1.04 and the $1.03922 support level.

The 14-period Daily RSI at 35.49 indicates a EUR/USD break below the $1.05230 support level before entering oversold territory.

4-Hour Chart

The EUR/USD sits below the 50-day and 200-day EMAs, affirming the bearish price signals. A EUR/USD break above the 50-day EMA would support a EUR/USD move through the $1.06342 resistance level to target $1.07.

However, a fall through the $1.05230 support level would bring the $1.03922 support level into play.

The 14-period 4-Hourly RSI at 49.32 indicates a EUR/USD break below the $1.05230 support level before entering oversold territory.