EUR/USD Forecast: Euro’s Slippery Slope – Hawkish Fed vs. ECB’s Dilemma

Highlights

• EUR/USD grappled with a 0.29% decline on Thursday, retracting gains to settle at $1.06957.
• August’s German inflation figures await finalization; preliminary data indicates a dip from 6.2% to 6.1%.
• The ECB monetary policy stance sways with inflation revisions.

Thursday Overview

The EUR/USD fell by 0.29% on Thursday. Reversing a 0.05% gain from Wednesday, the EUR/USD ended the day at $1.06957. The EUR/USD rose to a high of $1.07317 before falling to a low of $1.06858.

German Inflation to Wrap Up a Bruising Week for the EUR

Finalized German inflation figures for August will draw interest. According to prelim numbers, the annual inflation rate softened from 6.2% to 6.1%. Revisions to the prelim numbers will influence sentiment toward ECB monetary policy goals.

Despite a deteriorating macroeconomic environment, a September ECB rate hike remains on the table. Upward revisions to the prelim inflation figures would give the ECB hawks more voice.

Rising interest rates impact borrowing costs, forcing firms to reduce staff levels. A weakening labor market environment affects consumption, easing demand-driven inflationary pressures. Higher unemployment forces consumers to cut down on spending.

FOMC Member Speeches to Have Greater Influence

Voting FOMC Member Michael Barr is on the calendar to speak today. We expect increased sensitivity to FOMC member speeches. The markets are betting on the Fed holding interest rates unchanged this month. However, bets are turning more hawkish for November.

According to the CME FedWatch Tool, the probability of a November 25-basis point rate hike is 39.9%, up from 37.1% one week earlier.

Economic factors favor the dollar, and increasing expectations of a Fed rate hike further tilt the balance towards the dollar.

Short-Term Forecast:

The EUR/USD risks further decline due to a worsening macroeconomic climate. The dollar dominates, and potential ECB rate hikes could further stress the euro area economy.

EUR/USD Price Action

Daily Chart

The EUR/USD remained below the 50-day and 200-day EMAs, sending bearish price signals. US labor market numbers and softer Euro area GDP figures also left the EUR/USD below the trend line and $1.07635 resistance level.

Downward revisions to German inflation numbers and hawkish Fed comments would bring the $1.06342 support level into play.

However, a move through the $1.07635 resistance level would give the bulls a run at the trend line. The EUR/USD would need risk-on sentiment and assurances the Eurozone will avoid a recession to support a move.

The 14-Daily RSI at 35.55 indicates the EUR/USD can return to sub-$1.0650 before hitting oversold territory.

4-Hourly Chart

The EUR/USD stays well below the 200-day and 50-day EMAs, reaffirming the bearish price signals. Softer German inflation figures would ease bets on an ECB rate hike and give the bears a run at the $1.06342 support level.

However, a return to $1.0750 would give the bulls a run at the $1.07635 resistance level and the trend line. The EUR/USD would need dovish Fed comments to offer support.

The 14-4 Hourly RSI at 38.61 shows the EUR/USD can return to $1.0650 before entering oversold territory.