EUR/USD Forecast: Eurozone Inflation and the ECB to Impact Rate Path Bets

Highlights

• The EUR/USD gained 0.27% on Monday, ending the session at $1.09235.
• On Tuesday, Eurozone inflation figures for November will dictate early EUR/USD trends.
• US housing sector data and consumer confidence also warrant attention.

Monday Overview

The EUR/USD gained 0.27% on Monday. After a 0.89% slide on Friday, the EUR/USD ended the day at $1.09235. The EUR/USD fell to an early low of $1.08918 before reaching a high of $1.09312.

Eurozone Inflation and the ECB in Focus

On Tuesday, finalized November inflation figures for the Eurozone will garner investor interest. Upward revisions to preliminary inflation figures would support the ECB’s forward guidance on the rate path.

A higher-for-longer interest rate trajectory would impact borrowing costs and disposable income. The net effect would be to dampen demand-driven inflationary pressures.

According to the preliminary report, the annual inflation rate softened from 2.9% to 2.4% in November.

Away from the numbers, investors must consider ECB commentary. ECB Executive Board members Andrea Enria and Frank Elderson are on the calendar to speak on Tuesday. Forward guidance supporting a higher-for-longer rate path would drive buyer demand for the EUR/USD.

US Housing Sector in Focus

On Tuesday, the US housing sector will be in focus for the second consecutive session. A larger-than-expected fall in building permits and housing starts could raise concerns about the housing market. Economists forecast building permits and housing starts to decline by 1.2% and 0.8%, respectively, in November.

While weak figures would raise red flags, investors must consider recent trends to gauge housing market conditions. Notably, a more dovish rate path could drive home buyer demand and support the US economy.

Economists consider housing sector data to be leading indicators. The US real estate sector contributes over 15% to the economy. Significantly, increased buying activity could fuel consumer spending. Upward trends in consumer spending could fuel demand-driven inflation, forcing the Fed to maintain a more hawkish rate path.

Beyond the numbers, investors must monitor Fed commentary. Comments aligned with Fed Vice Chair John Williams could impact the buyer appetite for the EUR/USD. On Friday, the Fed Vice Chair warned that it was too soon to call victory on the fight against inflation and Fed rate cuts.

Short-Term Forecast:

Near-term, EUR/USD trends will hinge on inflation and central bank forward guidance. Sticky US inflation and hawkish Fed chatter could force the markets to reduce bets on a Q1 2024 Fed rate cut. A robust US economy and sticky inflation could suggest a EUR/USD pullback from current levels.

EUR/USD Price Action

Daily Chart

The EUR/USD held above the 50-day and 200-day EMAs, sending bullish price signals.

A EUR/USD breakout from the $1.09294 resistance level would bring the $1.10720 resistance level into play.

Eurozone inflation, ECB commentary, the US housing market, and the Fed need consideration.

However, a EUR/USD fall through the $1.08500 handle would support a drop to the 50-day EMA and the $1.07838 support level.

The 14-period Daily RSI, 57.77, suggests a EUR/USD return to the $1.10 handle before entering overbought territory.

4-Hour Chart

The EUR/USD sat above the 50-day and 200-day EMAs, affirming bullish price signals.

A EUR/USD break above the $1.09294 resistance level would support a move toward the $1.10720 resistance level.

However, a drop below the 50-day EMA would bring the 200-day EMA and the $1.07838 support level into play.

The 14-period RSI on the 4-hour chart, 58.31, indicates a EUR/USD move to the $1.10 handle before entering overbought territory.