EUR/USD Forecast: Inflation, PMIs, and ECB Voices – Unpacking the EUR USD Dynamics

Highlights

• EUR/USD gained 0.19% on Monday to end the session at $1.07938.
• Concerns mount for the German economy and its influence on the euro area.
• ECB guidance post-September rate decision will heavily influence market sentiment.

Monday Overview

On Monday, the EUR/USD gained 0.19%. Partially reversing a 0.65% loss from Friday, the EUR/USD ended the day at $1.07938. The EUR/USD fell to a low of $1.07716 before rising to a high of $1.08088.

Euro Area Services PMIs and ECB Commentary in Focus

ECB President Christine Lagarde will influence the European session. She emphasized high inflation on Monday. Any shift in stance would surprise the markets. The German economy is a concern for the euro area.

Euro area service PMIs require attention. Declines in Italy and Spain would suggest a drop in the Eurozone PMI, impacting buyer interest. Preliminary data shows the Eurozone Services PMI decreased from 50.9 to 48.3 in August. Given the service sector’s contribution to the euro area economy, weaker PMIs would raise more economic red flags.

While ECB President Lagarde will garner the most interest, investors should monitor ECB Executive Board Member speeches. Luis de Guindos, Isabel Schnabel, and Edouard Fernandez-Bollo are on the calendar to speak today.

Fed Speeches to Limit the Influence of US Factory Orders

Bets on the Fed ceasing its monetary tightening increase the significance of Fed speeches. Hawkish FOMC comments could sway sentiment on interest rates. No FOMC members are on the calendar to speak, leaving media interactions to influence.

We anticipate Fed remarks to overshadow the effect of US factory orders on the EUR/USD. With the US services sector comprising over 70% of the economy, it has more significance.

Immediate Forecast: Lagarde and ECB Executive Board Members in Focus

Service sector PMIs are notable, but the market attention is on the ECB due to persistent inflation concerns. The ECB is unlikely to address Eurozone recession risks until after the September rate decision, but guidance beyond that will be impactful.

EUR/USD Price Action

Daily Chart

The EUR/USD remained below the 50-day and 200-day EMAs, sending bearish price signals. However, the EUR/USD held above the trend line and the $1.07635 support level this morning. A EUR/USD move through the 200-day EMA would give the bulls a run at the $1.08322 resistance level.

However, services PMIs and ECB commentary must align to support a breakout from the 200-day EMA. A larger-than-expected fall in the services PMI and less hawkish ECB commentary would see the EUR/USD break below the trend line. A break below the trend line would bring the $1.07635 support level and $1.0750 into play.

Considering the 14-Daily RSI at 39.16 and the EMA signals, the EUR/USD could retreat to $1.0750 before entering oversold territory.

4-Hourly Chart

The 4-Hourly Chart continues to reaffirm the near-term bearish trend. The EUR/USD sits below the 200-day and 50-day EMAs and the $1.08322 resistance level. However, the EUR/USD remains above the trend line and the $1.07635 support level.

Avoiding a break below the trend line would give the bulls a run at the $1.08322 resistance level and 50-day EMA. However, Services PMIs and ECB commentary must support a breakout.

A larger-than-expected fall in service PMIs and mixed ECB policy signals could see the EUR/USD break below the trend line. A break below the trend line would bring the $1.07635 support level and $1.0750 into play.

With the downward bias intact, the 14-4H RSI at 41.66 shows the EUR/USD has more room to fall before entering oversold territory.