EUR/USD Forecast: German GDP and Inflation to Set the Tone for the Week

Highlights

• The EUR/USD slipped by 0.03% on Friday, ending the session at $1.05586.
• On Monday, German GDP and inflation figures will be in the spotlight.
• News updates from the Middle East also need consideration as investors look for signs of a wider regional conflict.

Friday Overview

The EUR/USD slipped by 0.03% on Friday. Following a 0.04% decline on Thursday, the EUR/USD ended the day at $1.05586. The EUR/USD fell to a low of $1.05352 before rising to a high of $1.05970.

German GDP and Inflation to Set the Tone

On Monday, the German economy will be in the spotlight. Q3 GPP and October inflation figures will garner investor interest.

Third-quarter GDP numbers will impact the buyer appetite for the EUR/USD. A more marked contraction in the German economy will pressure the EUR. A prolonged German economic recession may limit the ECB’s ability to maintain higher interest rates for an extended period.

A deterioration in the macroeconomic environment could impact labor market conditions and disposable income. A downward trend in disposable income may ease demand-driven inflationary pressures, bringing forward the bets on the timing of an ECB rate cut.

Economists forecast the German economy to contract by 0.7% year-over-year in the third quarter. Quarter-on-quarter, economists expect the economy to contract by 0.3%.

Later in the Monday session, German inflation figures for October also warrant consideration. Sticky inflation would leave a higher-for-longer rate path on the table at the expense of the German economy. German private consumption accounts for over 50% of the German economy. A higher-for-longer interest rate environment could lead consumers to reduce spending, impacting the economy.

Beyond the economic indicators, ECB commentary will also move the EUR/USD dial. ECB Executive Board members Luis de Guindos and Andrea Enria are on the calendar to speak. ECB references to the economy, inflation, and monetary policy need monitoring.

Dallas Fed Manufacturing Index in Focus Pre-Fed

On Monday, the Dallas Manufacturing Index will draw investor attention. Economists forecast the Index to rise from -18.1 to -15.0. The Index is unlikely to sway bets on the Fed interest rate decision. The US manufacturing sector contributes less than 25% to the US economy.

However, investors will likely be sensitive to any cracks in the US economy. Positive numbers would ease fears of a hard landing.

Beyond the economic calendar, the Middle East conflict remains a focal point. News of an escalation would drive demand for the safety of the US dollar.

Short-Term Forecast:

Near-term trends hinge on the Fed, US services PMIs, and the US Jobs Report. A pickup in economic activity and wage growth could refuel bets on a December Fed rate hike. Parity remains off the table for now. But GDP and inflation numbers for the Eurozone (Tues) could redraw the EUR/USD trajectory.

EUR/USD Price Action

Daily Chart

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

A EUR/USD break above $1.06 could support a move to the $1.06342 resistance level and the 50-day EMA. German GDP and inflation will be the focal points on Monday. Better-than-expected GDP and softer-than-expected inflation figures would fuel demand for the EUR.

However, a break below the trend line and $1.05173 support level would give the bears a look at sub-$1.05.

The 14-period Daily RSI, 45.91, indicates a EUR/USD break below the trend line and $1.05173 support level before entering oversold territory.

4-Hour Chart

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

A EUR/USD break above the 50-day EMA could support a move to the 200-day EMA and $1.06342 resistance level.

However, a break below the $1.05173 support level would bring the trend line and sub-$1.05 into play.

The 14-period RSI on the 4-hour chart, 46.52, indicates a EUR/USD fall through the $1.05173 support level before entering oversold territory.