EUR/USD Forecast: Dive to Sub-$1.05 Amid Dwindling German Consumer Confidence?

Highlights

• EUR/USD faced a 0.20% fall on Tuesday, closing the session at $1.05722.
• German consumer sentiment is under the microscope, indicating further weakening.
• ECB’s hawkish stance pushes EUR/USD toward parity amidst a bleak economic outlook.

Tuesday Overview

On Tuesday, the EUR/USD fell by 0.20%. Following a 0.49% loss on Monday, the EUR/USD ended the session at $1.05722.

Another choppy session saw the EUR/USD rise to a high of $1.06091 before sliding to a Tuesday low of $1.05620.

German Consumer Sentiment Takes Center Stage

The German economy will be in the spotlight again today. German consumer sentiment will be in focus. A deteriorating macroeconomic environment, the interest rate environment, and labor market uncertainty suggest a further weakening in consumer confidence.

Economists forecast the GfK Consumer Climate Indicator to slip from -25.5 to -26.0. A more marked decline in confidence would signal a pullback in consumer spending.

A pullback in spending would ease demand-driven inflationary pressures. However, German private consumption accounts for over 50% of the German economy. A downward trend in spending would support the deteriorating economic outlook.

The EUR/USD will be under pressure due to the higher-for-longer ECB interest rate outlook and a deteriorating macroeconomic environment.

Beyond the numbers, ECB commentary also needs consideration. Hawkish commentary amidst a gloomy economic outlook would maintain the EUR/USD’s trajectory toward parity.

US Core Durable Goods Orders

This afternoon, core durable goods orders will also draw investor interest. An unexpected fall in orders would fuel jitters of a US hard landing. Weaker-than-expected US services PMI and consumer confidence figures have raised early red flags that the US economy may be starting to struggle.

Economists forecast a 0.1% increase in core durable goods orders in August versus a 0.5% rise in July.

While weaker-than-expected numbers could fuel recession chatter, the Fed will likely brush aside the numbers. The US manufacturing sector accounts for less than 20% of GDP. The services sector and private consumption are fueling demand-driven inflationary pressures.

Higher interest rates would counter the effects of tight labor market conditions and wage growth. Softer wage growth would curb consumer spending and ease demand-driven inflationary pressures.

Short-Term Forecast:

The US dollar bulls remain in control. While cracks in the US economy are appearing, the euro area is heading for a pronounced economic recession. Monetary policy and economic divergence are tilted in favor of the US dollar, bringing sub-$1.05 into play.

EUR/USD Price Action

Daily Chart

The EUR/USD sat below the 50-day and 200-day EMAs, sending bearish price signals. An unexpected pickup in German consumer confidence would support a break above the $1.06342 resistance level. However, US economic indicators would need to avoid triggering recessionary fears.

Failure to break above the $1.06342 resistance level would leave the $1.05230 support level in play. A slump in consumer confidence and a jump in US core durable goods would signal a sharp pullback.

The 14-period Daily RSI at 28.33 indicates the EUR/USD in the oversold territory.

4-Hour Chart

The EUR/USD hovers below the 50-day and 200-day EMAs, reaffirming the bearish price signals. A break below the $1.05230 support level would give the bears a run at sub-$1.05.

However, a return to $1.06 would support a EUR/USD move to the $1.06342 resistance level.

The 14-period 4-Hourly RSI at 32.61 indicates a EUR/USD fall through the $1.05230 support level before entering oversold territory.