EUR/USD Forecast: From German Producer Prices to Fed’s Hawkish Hints, All Eyes on Rate Hikes

Highlights

• EUR/USD dipped by 0.12% to end the Tuesday session at $1.06792.
• German Producer Prices in August might hold clues to the broader economic demand landscape.
• The US Fed’s decisions on interest rates could be a defining moment for global economic forecasts.

Tuesday Overview

On Tuesday, the EUR/USD declined by 0.12%. Following a 0.30% gain on Monday, the EUR/USD ended the day at $1.06792. The EUR/USD rose to a high of $1.07179 before falling to a low of $1.06750.

German Producer Prices and the ECB in the Spotlight

Recently hawkish ECB commentary has paved an uncertain ECB monetary policy outlook. Investors interpreted the ECB press conference as a signal to end interest rate hikes. German producer prices for August will give the ECB and the markets a sense of the demand environment. Manufacturers reduce prices in a weak demand environment to win new contracts.

Economists forecast German producer prices to increase 0.2% in August versus a 1.1% slide in July.

While the economic indicators will influence, ECB Executive Board members could have more effect on the EUR/USD trajectory. Members Fabio Panetta, Isabel Schnabel, Elizabeth McCaul, Andrea Enria, and Frank Elderson are on the calendar to speak.

Hawkish comments would fuel bets on further ECB interest rate hikes to curb inflation. Higher interest rates would affect labor market conditions and wage growth. Softer wage growth would force consumers to cut spending, leading to softer demand inflation.

The US Federal Reserve and Fed Chair Powell Take Center Stage

The Fed will deliver its interest rate decision and FOMC economic projections on Wednesday. With the markets betting on the Fed hitting the pause button, the focus will be on the projections and Fed Chair Powell.

Upbeat revisions to GDP, unemployment, and inflation figures would fuel bets on a November Fed rate hike. A more hawkish Fed interest rate trajectory could also reduce the chances of a 2024 Fed interest rate cut.

In contrast, the Eurozone economy faces the risk of a recession. A recession would force the ECB to cut rates sooner than hoped to support an economic recovery. With the US economy demonstrating resilience, the dollar faces downside risk on an unexpectedly dovish set of economic projections.

Short-Term Forecast:

The dollar remains in the driving seat, with monetary policy and economic divergence tilted toward the dollar. However, the FOMC projections need to send hawkish signals to support the current EUR/USD trajectory.

EUR/USD Price Action

Daily Chart

The EUR/USD sat below the 50-day and 200-day EMAs, sending bearish price signals. A EUR/USD break below the $1.06342 support level would bring sub-$1.06 into play.

While German producer prices will provide direction, a return to sub-$1.06 will hinge on the FOMC economic projections and press conference.

However, a EUR/USD breakout from $1.07 would signal a EUR/USD move toward the $1.07635 resistance level. For the EUR/USD to break out, it would require hawkish comments from the ECB and a dovish stance from the Fed.

The 14-period Daily RSI at 38.16 signals a EUR/USD break below the $1.06342 support level before entering oversold territory.

4-Hour Chart

The EUR/USD remains below the 50-day and 200-day EMAs, reaffirming the bearish price signals. A EUR/USD break above the 50-day EMA would bring the $1.07635 resistance level into play.

However, failure to break above the 50-day EMA would leave the $1.06342 support level in play. A break below the $1.06342 support level would give the bears a run at sub-$1.06.

The 14-period 4-Hourly RSI at 48.13 supports a EUR/USD break below the $1.06342 support level before entering oversold territory.