EUR/USD Forecast: ECB’s Less Hawkish Stance and US Inflation Impact

Highlights

• The EUR/USD declined by 0.32% on Friday, ending the session at $1.07588.
• German inflation, the US Jobs Report, and the Michigan Consumer Sentiment Report left the EUR/USD in negative territory.
• On Monday, the ECB and US consumer inflation expectations are focal points.

Friday Overview

The EUR/USD declined by 0.32% on Friday. After a 0.27% gain on Thursday, the EUR/USD ended the day at $1.07588. The EUR/USD rose to a high of $1.08007 before falling to a low of $1.07238.

The Calm Before the Storm for the EUR/USD

On Monday, the ECB will be in focus as investors bet on a less hawkish ECB rate path. ECB Executive Board member Elizabeth McCaul is on the calendar to speak.

Investors must consider views on inflation, the economy, and discussions about interest cuts. Recent economic indicators from Germany and disappointing Eurozone GDP numbers raised concerns about a prolonged recession. However, a softer inflation backdrop could allow the ECB to cut rates and support business investment and consumption.

Lower borrowing costs could incentivize firms to hike wages and hire more staff, supporting a pickup in disposable income. An uptrend in disposable income could fuel consumer spending and the economy. Euro area private consumption contributes over 50% to the economy.

US Consumer Inflation Expectations in Focus

On Monday, US Consumer Inflation Expectation figures will garner investor interest. A pickup in consumer inflation expectations could test the buyer appetite for the EUR/USD before the US CPI Report (Tues).

Economists forecast that Consumer Inflation Expectations will rise from 3.6% to 3.8% in November.

Significantly, hotter-than-expected inflation numbers could force the Fed to leave rates higher for longer. An elevated interest rate environment impacts borrowing costs and reduces disposable income. A downward trend in disposable income would affect spending and dampen demand-driven inflationary pressures.

Short-Term Forecast:

Near-term trends for the EUR/USD hinge on the US CPI Report (Tues), the Fed (Wed), and the ECB (Thurs). Hotter-than-expected inflation, a hawkish Fed, and a dovish ECB could send the EUR/USD toward the $1.05 handle.

EUR/USD Price Action

Daily Chart

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

A EUR/USD break above the 50-day EMA and the $1.07838 resistance level would support a move toward the $1.09294 resistance level.

The ECB and the US inflation are the focal points.

However, a EUR/USD fall below the 200-day EMA would give the bears a run at the $1.06342 support level.

The 14-period Daily RSI, 45.15, indicates a EUR/USD fall to the $1.07000 handle before entering oversold territory.

4-Hour Chart

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

A EUR/USD break above the $1.07838 resistance level and 200-day EMA would bring the 50-day EMA into play.

However, a EUR/USD drop below the $1.07500 handle would bring the $1.06342 support level into view.

The 14-period RSI on the 4-hour chart, 38.25, indicates a EUR/USD fall to $1.07 before entering oversold territory.