EUR/USD Forecast: ECB Decision to Steer Pair Amid Recession Fears

Highlights

• EUR/USD fluctuated this week, falling 0.23% Wednesday after a modest gain the day prior
• Economists predict unchanged interest rates at 4.25%, despite growing chance of a 25-bp hike.
• A surge in US retail sales and producer prices might influence bets on a November Fed rate hike.

Wednesday Overview

The EUR/USD fell by 0.23% on Wednesday. Following a 0.03% gain on Tuesday, the EUR/USD ended the day at $1.07292. The EUR/USD rose to a high of $1.07649 before falling to a low of $1.07107.

ECB Monetary Policy Decision and Press Conference in the Spotlight

The ECB’s September monetary policy decision and ECB President Lagarde’s press conference are in focus today.

Recent euro-area economic indicators have raised the prospects of a euro-area-wide economic recession. However, ECB concerns over sticky inflation have left interest rate hikes on the table. Despite an increase in the chances of a 25-basis point interest rate hike, economists expect the ECB to leave interest rates unchanged at 4.25%.

If interest rates remain unchanged, the market focus will shift to ECB President Lagarde’s press conference. Economic and inflation forecasts and the ECB President’s view on interest rates will impact the EUR/USD pair.

Sticky inflation may prompt further rate hikes, but economic challenges could leave the ECB data dependent. A weak macroeconomic environment impacts labor markets and disposable incomes, which in turn can reduce spending and demand-driven inflation, decreasing the urgency for the ECB to raise rates.

US Economic Calendar to Test the Fed Policy Pause Theory

US jobless claims, producer prices, and retail sales will draw interest later today. The markets eased bets on further Fed rate hikes in response to softer US core inflation. However, a surge in retail sales and a pickup in producer prices could refuel bets on a November Fed rate hike.

Steady labor market conditions support wage growth, which drives consumption and demand-driven inflation. Given that producer prices are a leading indicator for inflation, investors should consider US economic indicators.

Short-Term Forecast:

Near-term movement hinges on the ECB monetary policy decision and forward guidance. However, the US macroeconomic environment remains more robust, supporting the dollar beyond market reaction to the ECB.

EUR/USD Price Action

Daily Chart

The EUR/USD remained below the 50-day and 200-day EMAs, reaffirming bearish price signals. A EUR/USD break above the $1.07635 resistance hinges on the ECB monetary policy decision and press conference. An unexpected rate hike would bring the trend line and 200-day EMA into view.

However, a dovish ECB hold on interest rates and better-than-expected US economic indicators would give the bears a run at the $1.06342 support level.

The 14-period Daily RSI at 39.73 indicates the EUR/USD can fall to sub-$1.0650 before entering oversold territory.

4-Hour Chart

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

However, failure to break above the 50-day EMA would bring sub-$1.07 and 1.0650 into view.

The 14-period 4-Hourly RSI at 50.07 leaves the EUR/USD neutral ahead of the ECB interest rate decision and press conference.