EUR/USD Forecast: German Business Sentiment in Focus Pre-ECB

Highlights

• The EUR/USD fell by 0.74% on Tuesday, ending the session at $1.05895.
• A deeper contraction across the Euro area private sector will test buyer appetite for the EUR ahead of the ECB interest rate decision.
• On Wednesday, German business sentiment will draw investor interest.

Tuesday Overview

On Tuesday, the EUR/USD declined by 0.74%. Partially reversing a 0.71% gain from Monday, the EUR/USD ended the day at $1.05895. The EUR/USD rose to a high of $1.06945 before falling to a low of $1.05829.

German Business Sentiment in the Spotlight Pre-ECB

The German economy is in the spotlight again on Wednesday. German Ifo Business Climate figures for October will garner investor attention. Economists forecast the headline Ifo Business to increase from 85.7 to 85.9.

While the headline figure needs consideration, investors must view the components. An improved Business Expectations Index would raise hopes of an improving macroeconomic environment.

On Tuesday, the German private sector PMI survey revealed firms were less pessimistic about their outlook, supporting the Ifo forecasts.

A pickup in business expectations may support investment, including hiring, which would improve the demand outlook. Eurozone private consumption accounts for over 50% of the Eurozone economy.

Beyond the numbers, ECB President Christine Lagarde is on the ECB calendar to speak on Wednesday. References to the economy, inflation, and monetary policy will influence the EUR/USD.

US Housing Sector Is a Litmus Test of the US Economy

On Wednesday, US new home sales will be in focus. Elevated mortgage rates continue to impact homebuyer demand. The US construction sector contributes less than 5% to the economy. However, the housing sector affects consumer sentiment. Elevated mortgage rates may lead to a pullback in consumer spending.

US private consumption contributes over 65% to the US economy. A weak demand outlook may ease pressure on the Fed to raise interest rates.

Economists forecast new home sales to tumble by 11.0% in September, following an 8.7% slide in August.

Beyond the numbers, investors must monitor news updates from the Middle East. The threat of a widening regional conflict would fuel demand for the safety of the US dollar.

Short-Term Forecast:

Private sector PMIs set the near-term trend for the EUR/USD. However, the ECB and US inflation figures will likely decide the fate of the EUR/USD ahead of the US nonfarm payrolls and Fed interest rate decision.

EUR/USD Price Action

Daily Chart

The EUR/USD sat below the 50-day and 200-day EMAs, sending bearish price signals.

A EUR/USD break above the $1.06342 resistance level would support a breakout from the 50-day EMA to target $1.07.

Upbeat German business sentiment and a deteriorating US housing sector will likely fuel buyer appetite for the EUR.

However, an unexpected slump in business expectations and an escalation in the Middle East conflict would test buyer demand.

A EUR/USD drop below the trend line would give the bears a run at the $1.05173 support level.

The 14-period Daily RSI, 49.62, suggests a EUR/USD drop below the trend line before entering oversold territory.

4-Hour Chart

The EUR/USD sits above the 50-day EMA while hovering below the 200-day EMA, sending bullish near-term but bearish longer-term price signals.

A EUR/USD break above the 200-day EMA and $1.06342 resistance level would bring $1.07 into view.

A fall through the 50-day EMA would give the bears a run at the trend line and $1.05173 support level.

The 14-period RSI on the 4-hour chart, 50.55, suggests a EUR/USD break above the 200-day EMA and $1.06342 resistance level before entering overbought territory.